•the costs, disruption and diversion of our management's attention associated with campaigns by activist securityholders; and
•adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of any derivative instruments that we may enter into.rates.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 1A. Risk Factors" in Part I and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Annual Report on Form 10-K. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.
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PART I
Item 1. Business
General
Valaris plcLimited is a global offshore contract drilling company. Unless the context requires otherwise, the terms "Valaris," "Company," "we," "us" and "our" refer to Valaris plcLimited together with all its subsidiaries and predecessors.
We are a leading provider of offshore contract drilling services to the international oil and gas industry. We currently own an offshore drilling rig fleet of 61 rigs,industry with drilling operations in almost every major offshore market across fivesix continents. Our rig fleet includes 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 45 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. We operateown the world's largest offshore drilling rig fleet, amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning nine countries on five continents.global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Contract Drilling Operations
Our business consists of four operating segments: (1) Floaters, which includedincludes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-partiesthird parties and the activities associated with our lease arrangements with ARO under the Rig Lease Agreements, the Secondment Agreement and the Transition Services Agreement.ARO. Floaters, Jackups and ARO are also reportable segments.
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We own and operate 6153 rigs, 27of which 16 are located in the Middle East and Africa, and Asia Pacific, 1116 are located in North and South America, and 2316 are located in Europe, and five are located in Asia and the Pacific Rim as of December 31, 2020.2023.
Our drilling rigs drill and complete oil and natural gas wells. From time to time, our drilling rigs may be utilized as accommodation units or for non-drillingother ancillary services such as well workovers and interventions, plug and abandonment and decommissioning work.work and carbon capture and sequestration projects. Demand for our drilling services is based upon many factors beyond our control. See “Item 1A.“Item 1A. Risk Factors - The success of our business largely depends on the level of activity in theoffshore oil and natural gas industry,exploration, which can be significantly affected by volatile oil and natural gas prices.”
Our drilling contracts are the result of negotiationsnegotiated with our customers, and most contracts are awarded uponfollowing competitive bidding. The terms of our drilling contracts can vary, significantly, but generally contain the following commercial terms:
•contract duration or term for a specific period of time or a period necessary to drill one or more wells,
•term extension options, exercisable by our customers, upon advance notice to us, at mutually agreed, indexed, fixed rates or current rate at the date of extension,
•provisions permitting early termination of the contract, which may include (1) if the rig is lost or destroyed, (2) if operations are suspended for a specified period of time due to various events, including damage or breakdown of major rig equipment, unsatisfactory performance, or "force majeure" events, (3) failure of the customer to receive final investment decision (FID) approval with respect to projects for which the drilling rig was contracted or (3)(4) at the convenience (without cause) of the customer, (inexercisable upon advance notice to us, and in certain cases obligating the customer to pay uswithout making an early termination fee providing some level of compensationpayment to us, for the remaining term),
•payment of compensation to us is (generally in U.S. dollars although some contracts require a portion of the compensation to be paid in local currency) on a day rate basis such that we receive a fixed amount for each day that the drilling rig is under contract (lower day rates generally apply for limited periods when operations are suspended due to various events, including during delays that are beyond our reasonable control, during repair of equipment damage or breakdown and during periods of re-drilling damaged portions of the well, and no day rate, or zero rate, generally applies when these limited periods are exceeded until the event is remediated, and during periods to remediate unsatisfactory performance or other specified conditions),
•payment by us of the operating expenses of the drilling rig, including crew labor and incidental rig supply and maintenance costs,
•mobilization and demobilization requirements of us to move the drilling rig to and from the planned drilling site, and may include reimbursement of all or a portion of these moving costs by the customer in the form of an up-front payment, additional day rate over the contract term or direct reimbursement, and
•provisions allowing us to recover certain labor and other operating cost increases includingfrom our customers through day rate adjustment or direct reimbursement for certain cost increases due to changes in applicable law from our customers through day rate adjustment or direct reimbursement.rising operational expenses.
Backlog Information
| 2020 | 2019 | ||||||||||
| Floaters | $ | 205.7 | $ | 847.3 | |||||||
| Jackups | 859.5 | 1,281.2 | |||||||||
Other(1) | 140.1 | 324.3 | |||||||||
| Total | $ | 1,205.3 | $ | 2,452.8 | |||||||
| 2021 | 2022 | 2023 | 2024 and Beyond | Total | |||||||||||||||||||||||||
| Floaters | $ | 205.7 | $ | — | $ | — | $ | — | $ | 205.7 | |||||||||||||||||||
| Jackups | 548.7 | 235.8 | 75.0 | — | 859.5 | ||||||||||||||||||||||||
Other(1) | 130.2 | 9.9 | — | — | 140.1 | ||||||||||||||||||||||||
| Total | $ | 884.6 | $ | 245.7 | $ | 75.0 | $ | — | $ | 1,205.3 | |||||||||||||||||||
Major Customers
We provide our contract drilling services to major international, government-owned and independent oil and gas companies. During 2020,the year ended December 31, 2023, our five largest customers accounted for 41%40% of consolidated revenues. BP plc, our only customer who accounts for 10% or more of consolidated revenues, accounted for 11% of consolidated revenues.
Competition
The offshore contract drilling industry is highly competitive. Drilling contracts are, for the most part, awarded on a competitive bid basis. Price is often the primary factor in determining which contractor is awarded a
contract, although quality of service, operational and safety performance, equipment suitability and availability, location of equipment, reputation and technical expertise also are factors. There are numerous competitors
Non-U.S. Operations
Revenues from non-U.S. operations were 80%, 78%, 87% and 81% of our total consolidated revenues during the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
See "Item 1A. Risk Factors - Our non-U.S. operations involve additional risks not associated with significant resourcesU.S. operations."
Insurance and Indemnification Matters
Our insurance program provides coverage, subject to the policies' terms and conditions and to the extent not otherwise assumed by the customer under the indemnification provisions of the drilling contract, for third-party liability claims arising from our operations. Our insurance program provides coverage that is customary for our industry. Generally, our insurance program provides third-party liability coverage up to $805.0 million. We retain the risk for liability not indemnified by the customer in excess of, and for risks not covered by, our insurance coverage.
Our insurance program also provides hull and machinery coverage for physical damage (including total loss) to our rigs, cargo and equipment, excluding damage arising from a named windstorm in the offshoreU.S. Gulf of Mexico. We separately purchase a small limit of named windstorm insurance for our floater rigs in the U.S. Gulf of Mexico. We currently carry limited insurance for loss of hire for several of our rigs.
Our customers typically indemnify us for most well-control events. Well-control events generally include an unintended release from a well that cannot be contained by using equipment on site, such as a blowout preventer, by increasing the weight of drilling fluid or by diverting the fluids safely into production facilities. Subject to the exceptions noted below, our customers typically assume most of the responsibility for and indemnify us from any loss, damage or other liability resulting from pollution or contamination arising from operations. Such pollution or contamination may be as a result of blowouts, cratering and seepage, when the source of the pollution originates from the well or reservoir. Such indemnities typically include costs for clean-up and removal of pollution and third-party damages.
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Our drilling contracts customarily provide that each party is responsible for injuries or death to their respective personnel and loss or damage to their respective property (including the personnel and property of each parties’ contractors and subcontractors) regardless of the cause of the loss or damage. However, exceptions may exist as it relates to damages due to our negligence. In addition, our drilling contracts typically provide for our customers to indemnify us, generally based on replacement cost minus some level of depreciation, for loss or damage to our down-hole equipment. In some cases, we are indemnified by our customer for a limited amount of the repair of or replacement cost of our subsea equipment. We also maintain insurance for exposures to personal injuries, damage to or loss of property and certain business risks.
We generally indemnify the customer for legal and financial consequences of spills of waste oil, fuels, lubricants, motor oils, pipe dope, paint, solvents, ballast, bilge, garbage, debris, sewage, hazardous waste and other liquids, the discharge of which originates from our rigs or equipment above the surface of the water and in some cases from our subsea equipment. Our contracts generally provide that, in the event of any such spill from our rigs, we are responsible for the related fines and penalties.
The above description of our insurance program and the indemnification provisions of our drilling contracts is only a summary as of the date hereof and is general in nature. In addition, our drilling contracts are individually negotiated, and the degree of indemnification we receive from operators against the liabilities discussed above can vary from contract to contract based on market conditions and customer requirements existing when the contract was negotiated and the interpretation and enforcement of applicable law when the claim is adjudicated. Our insurance program and the terms of our drilling industry.contracts may change in the future.
In certain cases, vendors who provide equipment or services to us limit their pollution liability to a specific monetary cap, and we assume the liability above that cap. Typically, in the case of original equipment manufacturers, the cap is a negotiated amount based on mutual agreement of the parties considering the risk profiles and thresholds of each party. However, for smaller vendors, the liability is usually limited to the value, or double the value, of the contract for the purchase of such equipment or services.
Additional information on insurance and indemnification matters and related risks is discussed in “Item 1A. Risk Factors,” which should be read in conjunction with the foregoing information.
Governmental Regulation and Environmental Matters
Our operations are affected by laws, regulations and political initiatives and by laws and regulations that relate to the oil and natural gas industry, including laws and regulations that have or may impose increased oil-spill related and financial responsibility and oil spill abatement contingency plan capability requirements. Accordingly, we will be directly affected by the approval and adoption of lawsLaws and regulations curtailing exploration and development drilling for oil and natural gas will directly affect us for economic, environmental, safety or other policy reasons. It is also possible that these laws, and regulations and political initiatives could adversely affect our operations in the future by significantly increasing our operating costs or restricting areas open for drilling activity. See "Item 1A. Risk Factors- Increasing regulatory complexity could adversely impactWe incorporate by reference herein the costs associated with our offshore drilling operations."
•require the acquisition"Item 1A. Risk Factors – Regulatory, Legal and Tax Risks";
•"Item 1A. Risk Factors – Sustainability Risks";
•"Item 3. Legal Proceedings"; and
•"Item 7. Management's Discussion and Analysis of various permits before drilling commences;Financial Condition and Results of Operations – Liquidity and Capital Resources – Effects of Climate Change and Climate Change Regulation.
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The International Convention on Oil Pollution Preparedness, Response and Cooperation, the International Convention on Civil Liability for Oil Pollution Damage 1992, the U.K. Merchant Shipping Act 1995, Marpol 73/78 (the International Convention for the Prevention of Pollution from Ships), the U.K. Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998, as amended, and other related legislation and regulations and the Oil Pollution Act of 1990 ("OPA 90"), as amended, the Clean Water Act and other U.S. federal statutes applicable to us and our operations, as well as similar statutes in Texas, Louisiana, other coastal states and other non-U.S. jurisdictions, address oil spill prevention, reporting and control and have significantly expanded potential liability, fine and penalty exposure across many segments of the oil and natural gas industry. Such statutes and related regulations impose a variety of obligations on us related to the prevention of oil spills, disposal of waste and liability for resulting damages. For instance, OPA 90 imposes strict and, with limited
exceptions, joint and several liability upon each responsible party for oil removal costs as well as a variety of fines, penalties and damages. Similar environmental laws apply in our other areas of operation. Failure to comply with these statutes and regulations may subject us to civil or criminal enforcement action, which may not be covered by contractual indemnification or insurance, or for which indemnity is prohibited under applicable law, and could have a material adverse effect on our financial position, operating results and cash flows.
Additionally, climate change is receiving increasing attention from scientists and legislators, and significant focus is being put on companies that are active producers of hydrocarbon resources.in the oil and natural gas industry. Globally, there are a number of legislative and regulatory proposals and executive orders at various levels of government in jurisdictions where we operate to address the greenhouse gasGHG emissions that contribute to climate change, such as laws or regulations requiring reporting on GHG emissions, incentivizing or mandating the use of alternative energy sources such as wind power and solar energy, phasing-out of fossil fuel subsidies, reducing GHG emissions, increasing fuel efficiency standards, adopting carbon pricing mechanisms, restricting oil and gas development and programs to mandate or incentivize the conversion from internal combustion engine powered vehicles to electric-powered vehicles.
Although it is not possible at this time to predict how compliance with any such legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such future laws and regulations could require us or our customers to incur increased operating costs.costs or incremental capital expenditures. Any such legislation or regulatory programs could also increase the cost of consuming oil and natural gas, and thereby reduce demand for oil and natural gas, which could reduce our customers’ demand for our services. Consequently, legislation and regulatory programs to reduce greenhouse gasGHG emissions could have an adverse effect on our financial position, operating results and cash flows.
Human Capital
We believe our people are one of the most important elements of our success, and we benefit from a motivated, engaged, and diverse workforce. Our approach to attracting, developing, and retaining a diverse workforce of high-performing talent is anchored in a long-term employment model that seeks to foster personal growth and engagement.
Purpose and Culture
At Valaris, our purpose is to provide responsible solutions that deliver energy to the world. Our values are designed to guide us in support of our purpose:
•piracy, kidnappingIntegrity – Doing the right thing; whether or not anyone is watching;
•Safety – Causing no harm is always a priority;
•Excellence – Delivering value to our customers while consistently raising the bar on performance;
•Respect – Treating others the way we would like to be treated;
•Ingenuity – Solving problems creatively; and extortion demands,
•Stewardship – Safeguarding where we work for the next generation.
Our Ethics and Compliance Policy and our Code of Conduct (the “Code”) form the foundation of our compliance and ethics program, which provides guidance on how to uphold our values. We have translated the Code into nine different languages, making it widely accessible to our employees across the globe. We maintain an Ethics Hotline that is available to all employees, either online or by phone, to confidentially seek guidance or raise a concern.
The Code is reviewed on a periodic basis and approved by our board of directors. To further support our values of respect and integrity, we have policies prohibiting corruption, bribery (including facilitation payments), money laundering, retaliation, and reprisals for raising concerns, including those related to worker rights, working conditions, mistreatment, fraud, and misconduct. In addition, we have adopted a policy against modern slavery and human trafficking in our business and our supply chains.
Employees
We had a global workforce of approximately 5,985 persons including contractors, and approximately 4,261 persons excluding contractors, as of December 31, 2023. Our personnel represented 74 nationalities spread across 23 locations. The majority of our personnel work on our offshore installations and are compensated on an hourly basis. A portion of our employees and contractors working outside of the U.S. are represented under collective bargaining or similar agreements, which are subject to periodic salary negotiation. As of December 31, 2023, women comprised 30% of our onshore employees and 1% of our offshore employees.
Employee Wellbeing and Engagement
We believe that one of the best ways to serve our customers is through creating a healthy, safe and engaging working and learning environment, where our employees are confident and comfortable to put their best work forward. We seek to promote a healthy environment by prioritizing the mental and physical health and other needs of our employees while recognizing them for their achievements and accomplishments. For example, in most countries where we work, we offer an employee assistance program (“EAP”) to employees and their families. Our EAP provides access to counselors and other mental health professionals as well as discounts to fitness centers, financial guidance and other benefits in support of our overall commitment to maintain a healthy workforce.
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Feedback from our employees plays a key role in creating an agile, collaborative and trustworthy culture. We use surveys to measure employee engagement as well as our ability to align and execute around a common vision and foster innovation and creativity. These surveys help our leaders analyze the impact of company practices and culture on performance and have created a roadmap for improvement.
Training and Retention
We are focused on developing talent and leadership among both our onshore and offshore employees. In 2021, we launched the Building Organizational Leadership (BOLD) training program. This program is designed to engage, support and provide leadership tools for our offshore supervisors, helping them assess and develop their team’s understanding and use of our safety processes and policies. Approximately 492 personnel attended the program in 2023. We implemented an onshore leadership program in 2023, which included eight separate onshore leadership sessions, which was delivered to 157 personnel.
We provide regular training in health, safety, environmental and emergency response to our employees, as relevant to their roles, and we mandate that our employees complete training related to the Code, covering topics such as anti-corruption, workplace behavior and conflicts of interest. In addition, in 2023, all employees were assigned unconscious bias training as part of supporting a more inclusive workforce. Certain employees must also complete additional training on topics ranging from trade compliance to human trafficking.
We created the Valaris Basic Training Program to familiarize new rig workers to the offshore environment and to build experience in our key safety practices, such as our Safe Systems of Work (as described below). The training program utilizes a jackup rig in the Gulf of Mexico as a training center for hands-on offshore experience. In 2023, 482 personnel completed the training program. The American Petroleum Institute’s Center for Offshore Safety recognized the Valaris Basic Training Center with the 2023 Safety Leadership Award.
Safety
Our policies set the expectation that causing no harm is a priority while conducting our operations. We seek to control major operational hazards with effective safeguards and to implement our management systems to protect the health and safety of our personnel.
Our Safe Systems of Work are designed with the aim of completing each job safely and efficiently:
•Work Instruction – Step-by-step description of how to complete specific work activities, including mandatory precautions to be implemented;
•significant governmental influence over many aspectsPermit to Work – Formal authorization and control process for the safe execution of local economies and customers, potentially hazardous work that may present risk to people, environment or assets;
•unexpected changes in law and regulatory requirements, including changes in interpretation or enforcementEnergy Isolation – Formal isolation of existing laws, all energy sources before performing work on equipment;
•work stoppages, often due to strikes over which we have little or noJob Safety Analysis – Identification and control of job hazards before starting work; and
•complications associated with repairingStop Work Authority – Empowerment to stop work if a risk to people, environment or assets is perceived to exist.
As mentioned above, the Valaris Basic Training Program demonstrates our dedication to a safety-first work culture, and replacing equipmentthe ways in remote locations, which we implement our Safe Systems of Work into our work.
Executive Officers
Officers generally serve for a one-year term or until successors are elected and qualified to serve. The table below sets forth certain information regarding our executive officers as of February 22, 2021:2024:
| Name | Age | Position | ||||||||||||
| President and Chief Executive Officer | ||||||||||||||
| Gilles Luca | Senior Vice President | |||||||||||||
| Senior Vice President | ||||||||||||||
| Senior Vice President | ||||||||||||||
Set forth below is certain additional information on our executive officers, including the business experience of each executive officer for at least the last five years:
Gilles Luca became Senior Vice President and Chief Operating Officer in December 2019. Previously, he served as the Company's Senior Vice President, - Chief Financial Officer since November 2015, and as Vice President - Finance and Vice President - Treasurer before his appointment as Chief Financial Officer. Prior to joining ValarisOperations Support. He joined Ensco in August 2013, Mr. Baksht served as a Senior Vice President at Goldman Sachs & Co. within the Investment Banking Division where he served as a financial advisor to energy clients, oilfield services lead and a member of the Merger & Acquisitions Group. Prior to joining Goldman Sachs in 2006, he consulted on strategic initiatives for energy clients at Andersen Consulting. Mr. Baksht holds a Master of Business Administration from the Kellogg School of Management at Northwestern University and a Bachelor of Science with High Honors in Electrical Engineering from the University of Texas at Austin.
On April 30, 2021 (the "Effective Date"), we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and common shares of Valaris with a nominal value of $0.01 per share (the “Common Shares”) were issued. Also, former holders of Legacy Valaris' equity were issued warrants (the "Warrants") to purchase Common Shares. See “Note 9 - Shareholders' Equity" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the issuance of the Common Shares and Warrants.
See“Note 2 – Chapter 11 Proceedings” and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional details regarding the reorganization, Chapter 11 Cases and related items.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports that we file with, or furnish to, the Securities and Exchange Commission ("SEC") in accordance with the Exchange Act are available free of charge on our website at www.valaris.com/investors. In addition, the SEC maintains an Internet sitea website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These reports also are available in print without charge by contacting our Investor Relations Department as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The information contained on our website is not included as part of, or incorporated by reference into, this report.
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RISK FACTORS SUMMARY
An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Form 10-K, before making a decision to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.
Risks Related to Chapter 11 Proceedings
•The COVID-19 pandemic and recent developments in the oil and gas industry could adversely impact our financial condition and results of operations.
•The offshore contract drilling industry historically has beenis highly competitive and cyclical, with periodscyclical.
•Our current backlog of low demandcontract drilling revenue may not be fully realized and excess rig availability that could resultmay decline significantly in adverse effects on our business.the future.
•Our business will be materially adversely affected if we are unable to secure contracts on economically favorable terms or if option periods in existing contracts are not exercised as expected.
•Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or other liabilities.
•We may suffer losses if our customers terminate or seek to renegotiate our contracts, if operations are suspended or interrupted or if a rig becomes a total loss.
•We have taken, and continueOur long-term contracts are subject to take, cost-reduction actions,the risk of cost increases, which may not be successful.
•Our drilling contracts with national oil companies may expose usnetwork and systems, including rig operating systems and critical data, are subject to greatercybersecurity risks than we normally assume in drilling contracts with non-governmental customers.
•Rig construction,reactivation, upgrade enhancement and reactivationenhancement projects are subject to risks, including delays and cost overruns, which could have a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
•FailureWe make significant expenditures to recruit and retain skilled personnel could adversely affect our business.
•Failure to recruit and retain skilled personnel could adversely affect our business.
•Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information.
•We may not realize the expected benefits of our ARO joint venture.
•Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
•Our business involves operating hazards, and our insurance and indemnities from our customers may not be adequate to cover any potential losses.
•Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
•Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
•Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility.flexibility with regard to the management of our personnel.
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•Significant partequipment or equipmentpart shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could increasematerially adversely affect our financial position, operating costs, decrease our revenues and adversely impact our operations.results or cash flows.
•Our long-term contracts are subjectoperating and maintenance costs will not necessarily fluctuate in proportion to the risk of cost increases, which could adversely affectchanges in our profitability.operating revenues.
•Our information technology systems, including rigability to pay our operating systems, are subject to cybersecurity risks and threats.capital expenses and make payments due on our debt depends on many factors beyond our control.
•Our Class A ordinary shares have been delistedactual financial results after emergence from bankruptcy may not be comparable to our projections filed with the NYSE.Bankruptcy Court in the course of the Chapter 11 Cases.
•The accounting method for our 2024 Convertible Notes could have a material effect on our reported financial results.
Regulatory, Legal Regulatory and Tax Risks
•Failure to comply with anti-corruption and anti-bribery statutes such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, could result in fines, criminal penalties and drilling contract terminations and an adverse effect on our business.terminations.
•Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations and reduce demand.
•Compliance with or breach of environmental laws can be costly and could limit our operations.
•Regulation of greenhouse gases and climate change could have a negative impact on our business.
•Governments may pass laws that subject us to additional taxation or may challenge our tax positions.
•Our consolidated effective income tax rate may vary substantially over time.
•Investor enforcement of civilWe are subject to litigation that could have a material adverse effect on us.
•As a Bermuda company, it may be difficult enforcing judgments against us, our directors and officers.
•Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
•Provisions in our bye-laws could delay or prevent a change in control of our company.
•Legislation enacted in Bermuda as to Economic Substance may be more difficult.affect our operations.
•Our business could be affected as a result of activist investors.
Risks Related to Our International Operations:Operations
•Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Sustainability Risks
•The U.K.'s withdrawal from the E.U. mayRegulation of GHGs and climate change could have a negative effectimpact on economic conditions, financial markets and our business.
•Consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition, may lead to reduced demand for our services.
•Increased scrutiny from stakeholders and others regarding our sustainability practices, initiatives and reporting responsibilities could result in additional costs or risks.
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Item 1A. Risk Factors
Risks Related to Our Business, Operations, Financing Arrangements and Market Conditions
The success of our business largely depends on the level of activity in theoffshore oil and natural gas industry,exploration, development and production, which can be significantly affected by volatile oil and natural gas prices.
The success of our business largely depends on the level of activity in offshore oil and natural gas exploration, development and production. Oil and natural gas prices, and market expectations of potential changes in these prices, significantly affect the level of drilling activity. Historically, when drilling activity and operator capital spending decline,declines, utilization and day rates also decline and drilling may be reduced or discontinued, resulting in an oversupply of drilling rigs. The oversupply of drilling rigs will be exacerbated by the entry of newbuild rigs into the market. Oil and natural gas prices have historically been volatile, and have declined significantly from prices in excess of $100 since mid-2014, causing operators to reduce capital spending and cancel or defer existing programs, substantially reducing the opportunities for new drilling contracts. Brent crude averaged nearly $42 per barrel in 2020 with a year-end price of $51. Commodity prices in 2021 have not improved to a level that supports increased rig demand sufficient to absorb existing rig supply and generate meaningful increases in day rates. We expect these trends to continue as long as commodity prices and rig supply remain at current levels. The lack of a meaningful recovery of oil and natural gas prices or further price reductions or volatility in prices may cause our customers to maintain historically low capital spending levels or further reduce their overall level of activity, indecline.
•regional and global economic conditions and changes therein,
•oil and natural gas supply and demand,
•expectations regarding future energy prices,
•the desire and ability of the Organization of Petroleum Exporting Countries ("OPEC")OPEC+, its members and other oil-producing nations, such as Russia, to reach further agreements to set and maintain production levels and pricing and to implement existing and future agreements,
•the availability of capital for oil and natural gas participants, including our customers, and capital allocation decisions by our customers, including the relative economics of offshore development versus onshorealternative prospects,
•the level of production by non-OPEC countries,
•U.S. and non-U.S. tax policy,
•advances in exploration and development technology,
•costs associated with exploring for, developing, producing and delivering oil and natural gas,
•the rate of discovery of new oil and natural gas reserves and the rate of decline of existing oil and gas reserves,
•laws and government regulations that limit, restrict or prohibit exploration and development of oil and natural gas in various jurisdictions, or materially increase the cost of such exploration and development, (such as the current moratorium on oil and gas leasing and permitting in federal lands and waters),
•the development and exploitation of alternative fuels or energy sources, resulting in reduced capital spending by our customers on oil and natural gas projects, and increased demand for electric-powered products, including electric-powered vehicles,
•disruption to exploration and development activities due to hurricanes and other severeadverse weather conditions and the risk thereof,
•natural disasters or incidents resulting from operating hazards inherent in offshore drilling, such as oil spills, and
•the worldwide military or political environment, including the invasion of Ukraine by Russia and the conflict in the Middle East and any related political or economic responses, global macroeconomic effects of trade disputes and increased tariffs and sanctions and uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East or geographic areas in which we operate, or acts of terrorism.terrorism, and
Higher commodity prices may not necessarily translate into increased activity, however, and even during periods of high commodity prices, customers may cancel or curtail their drilling programs, or reduce their levels of capital expenditureexpenditures for exploration and production for a variety of reasons, including their expectations for future oil and natural gas prices, andthe cost of exploration efforts, extended periods of price volatility, their lack of success in exploration efforts. Advances in onshore explorationefforts and development technologies, particularly with respect to onshore shale, could also result in our customers allocating more of theirre-allocating capital expenditure budgets to onshore exploration and production activities and less to offshore activities. expenditures for renewable energy projects.
These factors could cause our revenues and profits to decline further, as a result of declines in utilization and day rates, and limit our future growth prospects. Any significant decline in day rates or utilization of our drilling rigs could materially reduceadversely affect our revenuesfinancial position, operating results and profitability.cash flows. In addition, these risks could increase instability in the financial and insurance markets and make it more difficult for us to access capital and obtain insurance coverage that we consider adequate or are otherwise required by our contracts.
The offshore contract drilling industry historically has beenis highly competitive and cyclical, with periods of low demand and excess rig availability that could result in adverse effects on our business.cyclical.
Our industry is highly competitive, and our contracts are traditionally awarded on a competitive bid basis. Pricing, safety records and competency are key factors in determining which qualified contractor is awarded a job.contract. Rig availability, location and technical capabilities also can be significant factors in the determination. If we are not able to compete successfully, our revenues and profitability may be reduced.decline.
Our current backlog of contract drilling revenue may not be fully realized and may decline significantly in the future.
As of February 15, 2024 and February 21, 2023, our contract backlog was approximately $3.9 billion and $2.5 billion, respectively. This amount reflects the remaining contractual terms multiplied by the applicable contractual day rate. The contractual revenue may be higher than the actual revenue we ultimately receive because of a number of factors, including rig downtime or suspension of operations.
Several factors could cause rig downtime or a suspension of operations, many of which are beyond our control, including the early termination, repudiation or renegotiation of contracts, breakdowns of equipment, work stoppages, including labor strikes, shortages of material or skilled labor, surveys or inspections by government and maritime authorities, inability to obtain the requisite permits or approvals, periodic classification surveys, severe weather, strong ocean currents or harsh operating conditions, the occurrence or threat of epidemic or pandemic diseases, and any government response to such occurrence or threat and force majeure events.
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Our customers may seek to terminate, repudiate or renegotiate our drilling contracts for various reasons, including in the event of damage or a total loss of the drilling rig, the suspension or interruption of operations for extended periods due to breakdown of major rig equipment, failure to comply with performance conditions or equipment specifications, the failure of the customer to receive final investment decision (FID) with respect to projects for which the drilling rig was contracted or other reasons and “force majeure” events beyond the control of either party or other specific conditions. Generally, our drilling contracts permit early termination of the contract by the customer for convenience (without cause), exercisable upon advance notice to us, and in certain cases without making an early termination payment to us. In cases where customers are required to make an early termination payment, such payments would provide some level of compensation to us for the lost revenue from the contract but in many cases would not fully compensate us for all of the lost revenue. There can be no assurances that our customers will be able to or willing to fulfill their contractual commitments to us.
A decline in oil and natural gas prices and any resulting downward pressure on utilization may cause some customers to consider early termination of select contracts despite having to pay onerous early termination fees in certain cases. Customers may request to renegotiate the terms of existing contracts, or they may request early termination or seek to repudiate contracts. In addition, financially distressed customers may seek to negotiate reduced termination fees as part of a restructuring package. Furthermore, as contracts expire, we may be unable to secure new contracts for our drilling rigs. Therefore, revenues recorded in future periods could differ materially from our current backlog. Our inability to realize the full amount of our contract backlog or to secure a new contract with substantially similar terms on a timely basis could materially adversely affect our financial position, operating results or cash flows.
Our business will be materially adversely affected if we are unable to secure contracts on economically favorable terms or if option periods in existing contracts are not exercised as expected.
Our ability to renew expiring contracts or obtain new contracts and the terms of any such contracts will depend on market conditions. In December 2023, we took delivery of VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships") for an aggregate purchase price of approximately $337.0 million, which are currently uncontracted. Our customers’ decisions to exercise option periods resulting in additional work for the rig under contract also depend on market conditions. We may be unable to renew our expiring contracts, including contracts expiring fordue to a failure by the customer to exercise option periods, or obtain new contracts for the Newbuild Drillships or the drilling rigs under contracts that have expired or have been terminated, andterminated. In addition, the day rates under any new contracts or any renegotiated contracts may be substantially below the existing day rates, which could materially adversely affect our revenues and profitability. In addition, iffinancial position, operating results or cash flows. If customers do not exercise option periods under contracts that we currently expect to be exercised, we may face longer downtimeincreased idle time associated with the related rig,rigs, as we wouldmay have difficulty tendering that rig forsecuring additional work to cover the option period.
Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or other liabilities.
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liability generally has caps for ordinary negligence, with much higher caps or unlimited liability where the damage is caused by our gross negligence or willful misconduct. Notwithstanding a contractual indemnity from a customer, there can be no assurance that our customers will be financially able to assumefulfill their responsibility and honor their indemnityindemnification obligations to us for such losses. In addition, under the laws of certain jurisdictions, such indemnities under certain circumstances are not enforceable if the cause of the damage was our gross negligence or willful misconduct. This could result in us having to assume liabilities in excess of those agreed in our contracts due to customer balance sheet or liquidity issues or applicable law.
The loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, could materially adversely affect us.our business.
We provide our services to major international, government-owned and independent oil and natural gas companies. During 2020,2023, our five largest customers accounted for 41%40% of our consolidated revenues, in the aggregate, with our largest customer representing 11% of our consolidated revenues and a significant percentage of our operating cash flows. Our ability to retain existing significant customers may be adversely affected by the ongoing Chapter 11 Cases and certain of our largest customers have discussed with us our financial viability to perform for the duration of the potential terms of new contracts. Our financial position, operating results or cash flows may be materially adversely affected if any of our higher day rate contracts were terminated or renegotiated on less favorable terms or if a major customer terminates its contracts with us, fails to renew its existing contracts with us, requires renegotiation of our contracts or declines to award new contracts to us.
Our long-term contracts are subject to the risk of cost increases, which could adversely impact our profitability.
In general, our costs increase as the demand for contract drilling services and skilled labor increases.increase, which may materially adversely affect our financial position, operating results or cash flows. Our long-term contracts are subject to inflationary factors such as increases in skilled labor costs, material costs and overhead costs. While some of our contracts include cost escalation provisions that allow changes to our day rate based on stipulated cost increases or decreases, the timing and amount earned from these day rate adjustments may differ from our actual increase in costs and many contracts do not allow for such day rate adjustments. During times of reduced demand, reductions in costs may not be immediate as portions of the crew may be required to prepare our rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. Moreover, as our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels in a particular geographic location and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity a drilling rig is performing and the age and condition of the equipment.equipment, as well as the impact of supply chain disruptions and inflation on the costs of parts and materials. Contract preparation expenses vary based on the scope and length of contract preparation required.
Our network and systems, including rig operating systems and critical data, are subject to cybersecurity risk and technical disruptions.
Our business depends on technologies, systems and networks, including both operational technology and information technology (“IT”), to conduct our offshore operations and help run our financial and onshore operations functions, including the collection of payments from customers, payments to vendors and employees and storage of company records. Some of these systems are managed or provided by third-party service providers, including cloud platform or cloud software providers.
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Cybersecurity incidents, including unauthorized access, social engineering (including phishing), malware (including ransomware), distributed denial-of-service attacks, identity compromise and technical disruptions could materially impact our IT and operational technology systems, including rig operating systems, are subject to cybersecurity risks and threats.
Laws and regulations governing cybersecurity and data privacy and the unauthorized disclosure of confidential or protected information pose increasingly complex compliance challenges and potential costs, and any failure to comply with these data cybersecurity and privacy requirements or other applicable laws and regulations such as the European Union General Data Protection Regulationin this area could result in significant regulatory or other penalties and with effect from January 1, 2021, such regulation as amended and forming part of the law of the United Kingdom, disruptionlegal liability. Disruption to our operations and damage to our reputation which could materially adversely affect our financial position, operating results or cash flows. In
There can also be no assurance that our efforts, or the past,efforts of our partners and vendors, to invest in the protection of information technology infrastructure and data will prevent or identify incidents in our systems. While we have experienced data security breaches resultinga cybersecurity program and incident response plan in place to prepare for, detect, respond to, mitigate and recover from unauthorized access to our systems, which to date have not had a materialthe impact on our operations; however,of these attacks, cyber-attacks may leverage previously unknown vulnerabilities, sophisticated new techniques and emerging technologies and, there can be no assurance that such impactsour response will not be successful or effectively address the incident on a timely basis. As a result of a cybersecurity incident, we could suffer interruptions in our ability to manage our operations, which may materially adversely affect our business and financial results. In addition, we may incur large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, or to protect against similar future events. Regardless of the specific nature of a cybersecurity incident, we could experience material in the future.operational impact, financial loss, legal liability, regulatory violations or reputational harm.
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During periods of increased rig reactivation, upgrade and enhancement projects, shipyards and third-party equipment vendors may be under significant resource constraints to meet delivery obligations. Such constraints may lead to substantial delivery and commissioning delays, equipment failures and/or quality deficiencies. Furthermore, drilling rigs may face start-up or other operational complications following completion of upgrades or maintenance. Other unexpected difficulties, including equipment failures, design or engineering problems, could result in significant downtime at reduced or zero day rates or the cancellation or termination of drilling contracts.
Rig reactivation, upgrade, life extension and repair projects are subject to the risks of delay or cost overruns, including the following: failure of third-party equipment to meet quality and/or performance standards, delays in equipment deliveries or shipyard construction, shortages of materials or skilled labor, disruptions occurring as the result of pandemics and/or epidemics and related public health measures implemented by governments worldwide, damage to shipyard facilities, including damage resulting from fire, explosion, flooding, severe weather, terrorism, war or other armed hostilities, unforeseen design or engineering problems, including those relating to the commissioning of newly designed equipment, unanticipated actual or purported change orders, strikes, labor disputes or work stoppages, financial or operating difficulties of equipment vendors or the shipyard while enhancing, upgrading, improving or repairing a rig or rigs, unanticipated cost increases, foreign currency exchange rate fluctuations impacting overall cost, inability to obtain the requisite permits or approvals, client acceptance delays, disputes with shipyards and suppliers, latent damages or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, claims of force majeure events, and additional risks inherent to shipyard projects in a non-U.S. location. These risks could result in the cancellation or termination of drilling contracts for which the drilling rig was contracted or reduce the likelihood that such drilling rigs will receive a drilling contract if not already contracted.
We make significant expenditures to meet customer requirements, maintain our ordinary sharesfleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant expenditures to maintain our competitiveness.
We make substantial expenditures to maintain our fleet. These expenditures could increase as a result of changes in offshore drilling technology, the cost of labor and materials, customer requirements, fleet size, the cost of replacement parts for existing drilling rigs, the geographic location of the drilling rigs, length of drilling contracts, governmental regulations, maritime regulations and technical standards relating to safety, security or the environment, and industry standards.
Changes in offshore drilling technology, customer requirements for new or upgraded equipment, and competition within our industry may require us to make significant capital expenditures. In addition, changes in governmental regulations relating to decarbonization, environmental, emissions, safety or equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations, may require us to make additional unforeseen capital expenditures. In addition, commitments made by us, or our customers, to reduce emissions, or decarbonize, may require us to upgrade or retrofit our drilling rigs with additional equipment, less carbon intensive equipment or instrumentation. As a result, we may be required to take our drilling rigs out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our drilling rigs profitably during the remainder of their economic useful lives.
Additionally, in order to expand our fleet, we may require additional capital in the future. If we are unable to fund capital requirements with cash flows from operations or proceeds from sales of non-core assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by restrictive covenants in our debt agreements, bye-laws and regulations and by adverse market conditions resulting from, among others, general economic conditions, contingencies and uncertainties that are beyond our control. Similarly, when lenders and institutional investors reduce, and in some cases cease to provide, funding to industry borrowers, the liquidity and financial condition of us and our customers can be adversely impacted. If we raise funds by issuing equity securities, existing shareholders may experience dilution, and if we raise funds by issuing additional debt securities,
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we may have to pledge additional assets as collateral. Our failure to obtain the funds for necessary future capital expenditures could materially adversely affect our business and on our financial position, operating results or cash flows.
Failure to recruit and retain skilled personnel could materially adversely affect our business.
We require skilled personnel to operate our drilling rigs and to provide technical services and support for our business, and further rig reactivations will require that we hire additional skilled personnel. As demand for our services and the number of active drilling rigs has increased, competition for the labor required for drilling operations and construction projects has intensified, leading to shortages of qualified personnel in the industry. During periods of intensified competition, it is more difficult and costly to recruit, train and retain qualified employees, including in foreign countries that require a certain percentage of national employees. The most recent prolonged industry downturn and resulting reductions in offshore personnel wages further reduced the number of qualified personnel available. Hiring qualified and experienced personnel with the specialized skills and qualifications required to operate an offshore drilling rig is difficult due to the competitive labor market and lack of experience. In the current environment where competition for labor is intense, we may be required to increase existing levels of compensation to stay competitive in retaining a skilled workforce.
In addition, new personnel that we hire may need to undergo training to develop the skills needed to perform their job duties. There can be no assurance that our training programs will be adequate for these purposes, which could expose us to operational hazards and risks. We may also incur additional training costs to ensure that new or promoted personnel have the right skills and qualifications.
We also are subject to potential legislative or regulatory action that may impact working conditions, paid time off or other conditions of employment, including mandated vaccination programs. These conditions could further increase our costs or limit our ability to fully staff and operate our drilling rigs.
The increases in employment costs cause an increase in operating expenses, with a resulting reduction in net income, and our ability to fully staff and operate our drilling rigs may be negatively affected.
Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information, which could materially adversely affect our financial condition, operating results or cash flows.
We have implemented a shared service center program pursuant to which we have outsourced certain finance, human resources, supply chain and IT functions. We have and will continue to trade onalign the design and operation of our financial control environment as part of our shared service center program. As part of this market, whether broker-dealersprogram, we are outsourcing, and will continue to provide public quotesoutsource, certain accounting, payroll, human resources, supply chain and IT functions to a third-party service provider. The party that we utilize for these services may not be able to handle the volume of activity or perform the quality of service necessary to support our operations. The failure of the third-party to fulfill its obligations could disrupt our operations. In addition, the move to a shared service environment, including our reliance on a third-party provider, may create risks relating to the processing of transactions and recording of financial information. We could experience a lapse in the operation of internal controls due to turnover, lack of legacy knowledge, inappropriate training and use of a third-party provider, which could result in significant deficiencies or material weaknesses in our internal control over financial reporting and materially adversely affect our financial position, operating results or cash flows.
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We may not realize the expected benefits of our ordinary sharesARO joint venture.
ARO, our 50/50 unconsolidated ARO joint venture and a provider of offshore drilling services, faces many of the same risks as we face. Operating through ARO, in which we have a shared interest, may result in our having less control over many decisions made with respect to projects, operations, safety, utilization, internal controls and other operating and financial matters. ARO may not apply the same controls and policies that we follow to manage our risks, and ARO’s controls and policies may not be as effective. As a result, operational, financial and control issues may arise, which could materially adversely affect our financial position, operating results or cash flows. Additionally, in order to establish or preserve our relationship with our joint venture partner we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and return on this market, whether the trading volumeour investment in ARO compared to what we may traditionally require in other areas of our ordinary sharesbusiness.
ARO’s income and accounts receivable are concentrated with Saudi Aramco. The loss of this customer, or a substantial decrease in demand by this customer for ARO’s services, would have a material adverse effect on ARO’s business, results of operations and financial condition, which could materially adversely affect our financial position, operating results or cash flows.
We have issued a 10-year shareholder notes receivable to ARO (the “Notes Receivable from ARO”), which are governed by the laws of Saudi Arabia. In the event of a dispute with ARO over the repayment of the Notes Receivable from ARO, our ability to enforce the payment obligations of ARO or to exercise other remedies are subject to several significant limitations, including that our ability to accelerate outstanding amounts under the Notes Receivable from ARO is subject to the consent of Saudi Aramco and that the Notes Receivable from ARO are governed by the laws of Saudi Arabia, and we are limited to the remedies available under Saudi law. In addition, our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan described below, and as such, we may not be repaid the interest or principal amounts of the Notes Receivable from ARO.
We have a potential obligation to fund ARO for newbuild jackup rigs. The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The first two newbuild jackups were ordered in January 2020. The first rig, Kingdom 1, was delivered in the fourth quarter of 2023 and the second is expected to be delivered in the first half of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. There can be no assurance that the new jackup rigs will begin operations as anticipated.
The joint venture partners intend for the newbuild jackup rigs to be financed out of ARO's available cash on hand or from operations and/or funds available from third-party financing. In October 2023, ARO entered into a $359.0 million term loan to finance the remaining payments due upon delivery of the first two newbuild jackups and for general corporate purposes. Further, in the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Beginning with the delivery of the second newbuild, each partner's commitment shall be reduced by the lesser of the actual cost of each newbuild rig, or $250.0 million, on a proportionate basis. Any required capital contributions we make could negatively impact our liquidity position and financial condition.
As a result of these risks, it may take longer than expected for us to realize the expected returns on our investment in ARO or such returns may ultimately be less than anticipated. Additionally, if we are unable to make any required contributions, our ownership in ARO could be diluted which could hinder our ability to effectively manage ARO and could materially adversely affect our financial position, operating results or cash flows.
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Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
We have made investments in joint ventures other than ARO. Such investments are subject to the risk that the other shareholders of the joint venture, who may have different business or investment strategies than us or with whom we may have a disagreement or dispute, may have the ability to block business, financial, or management decisions (such as the decision to distribute dividends or appoint members of management), which may be crucial to the success of our investment in the joint venture, or could otherwise implement initiatives which may be contrary to our interests. Our partners may be unable, or unwilling, to fulfil their obligations under the relevant agreements regarding such joint ventures (for example by non-contributing working capital or other resources), or may experience financial, operational, or other difficulties that may adversely impact our investment in a particular joint venture. In addition, our partners may lack sufficient controls and procedures which could expose us to risk. If any of the foregoing were to occur, such occurrence could materially adversely affect our financial position, operating results or cash flows.
We may pursue other joint ventures that we believe will enable us to further expand or enhance our business. Any such joint venture would be evaluated on a case-by-case basis, and its consummation would depend upon numerous factors, including identifying suitable opportunities that align with our business strategy, reaching agreement with the potential counterparty on acceptable terms, the receipt of any applicable regulatory and other approvals, and other conditions. Any such joint venture would involve various risks, including among others (1) difficulties related to integrating or managing applicable parts of a joint venture and unanticipated changes in customer and other third-party relationships subsequent to closing, (2) diversion of management’s attention from day-to-day operations, (3) failure to realize anticipated benefits, such as cost savings, revenue enhancements or business synergies, (4) the potential for substantial transaction expenses and (5) potential accounting impairment or actual diminution or loss of value of our investment if future market, business or other conditions ultimately differ from our assumptions at the time any such transaction is consummated.
Our business involves operating hazards, and our insurance and indemnities from our customers may not be adequate to cover any potential losses.
The drilling of oil and natural gas wells involves numerous operating hazards, such as blowouts, reservoir damage, loss of production, loss of well control, uncontrolled formation pressures, lost or stuck drill strings, equipment failures and mechanical breakdowns, punch throughs, craterings, industrial accidents, fires, explosions, oil spills and pollution. Contract drilling requires the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and other parties or prosecution by governmental authorities. These hazards can cause personal injury or loss of life, severe damage to, or destruction of, property and equipment, pollution or environmental damage, which could lead to claims by employees, contractors or third parties and suspension of operations and contract terminations. Our drilling rigs are also subject to hazards associated with marine operations, either while docked, on site or during mobilization, such as capsizing, breaking free of moorings, sinking, grounding, collision, piracy, damage from adverse weather and marine life infestations. The U.S. Gulf of Mexico and the coasts of Australia are areas subject to hurricanes, typhoons and other adverse weather conditions, and our drilling rigs in these regions may be exposed to damage or a total loss by these storms, some of which may not be covered by insurance. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury to or death of rig personnel. Operations may also be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. Damage to the environment could also result from our operations, particularly through spillage of hydrocarbons, fuel, lubricants or other chemicals and substances used in drilling operations or fires. We may also be subject to property damage, environmental indemnity and other claims by third parties. Drilling involves certain risks associated with the loss of control of a well, such as blowout, cratering, the cost to regain control of or redrill the well and remediation of associated pollution. Our customers may be unable or unwilling to indemnify us against such risks. In addition, a court may decide that certain indemnities in our current or future drilling contracts are not enforceable. The law generally
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considers contractual indemnity for criminal fines and penalties to be against public policy, and the enforceability of an indemnity as to other matters may be limited.
Our insurance policies and drilling contracts contain rights to indemnity that may not adequately cover our losses, and we do not have insurance coverage or rights to indemnity for all risks. We have two main types of insurance coverage: (1) hull and machinery coverage for physical damage to our property and equipment and (2) excess liability coverage, which generally covers our liabilities arising from our operations, such as personal injury and property claims, including wreck removal and pollution. We have no hull and machinery insurance coverage for damages caused by named storms in the U.S. Gulf of Mexico for our jack-up fleet and only limited coverage for our floater fleet. We also retain the risk for any liability that exceeds our excess liability coverage. Pollution and environmental risks generally are not completely insurable.
If a significant accident or other event occurs that is not fully covered by our insurance or by an enforceable or recoverable indemnity, the occurrence could materially adversely affect our financial position, operating results or cash flows. The amount of our insurance may also be less than the related impact on enterprise value after a loss. Our insurance coverage will not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Our coverage includes annual aggregate policy limits. As a result, we generally retain the risk for any losses in excess of these limits. We currently only carry limited insurance for loss of hire for several of our rigs, and certain other claims may also not be reimbursed, in part or full, by insurance carriers. Any such lack of reimbursement may cause us to incur substantial costs. In addition, we could decide to retain more risk in the future, resulting in higher risk of losses, which could be material. Moreover, we may not be able to maintain adequate insurance in the future at rates that we consider reasonable or be able to obtain insurance against certain risks. Furthermore, our insurance carriers may assert that our insurance policies do not provide coverage for our losses. Our insurance policies also have exclusions of coverage for some losses. Uninsured exposures may include radiation hazards, loss of hire and losses relating to terrorist acts or strikes and some cyber events.As a result of increased costs to insurance companies due to regulatory, geopolitical, reputational or other developments, insurance companies that have historically participated in underwriting risks arising out of oil and natural gas operations may discontinue that practice, may reduce the insurance capacity they are willing to deploy or demand significantly higher premiums or deductibles to cover these risks. Additionally, a significant number of high cost climate-related insurance claims or natural catastrophes such as hurricanes, floods or windstorms may result in withdrawal of insurance capacity and increasing premiums to oil and natural gas industry companies.
Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
Geopolitical events have resulted in military actions, terrorist, pirate and other armed attacks, civil unrest, political demonstrations, mass strikes and government responses to such events. Military action by the U.S. or other nations could escalate, and acts of terrorism, piracy, kidnapping, extortion, acts of war, violence, civil war or general disorder may initiate or continue. Such acts could be directed against us or our assets. Such developments have caused instability in the world’s financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for oil and natural gas and could materially adversely affect the markets for our services, particularly to the extent that such events take place in regions with significant oil and natural gas reserves, refining facilities or transportation infrastructure. For example, the ongoing conflicts, and the continuation of, or any increase in the severity of, the conflicts in Ukraine and the Middle East, has led and may continue to lead to an increase in the volatility of global oil and natural gas prices. Insurance premiums could increase and coverage for these kinds of events may be unavailable in the future. Any or all of these effects could materially adversely affect our financial position, operating results or cash flows.
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Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
We currently own and operate 13 drilling rigs that are contracted with national oil companies. The terms of these contracts are often non-negotiable and may expose us to greater commercial, political and operational risks than we assume in other contracts, such as exposure to materially greater environmental liability, personal injury and other claims for damages (including consequential damages), or, in certain cases, the risk of early termination of the contract for convenience (without cause), exercisable upon advance notice to us, contractually or by governmental action, without making an early termination payment to us. We can provide no assurance that the increased risk exposure will not have an adverse impact on our future operations or that we will not increase the number of drilling rigs contracted to national oil companies with commensurate additional contractual risks.
The impact and effects of public health crises, pandemics and epidemics could have a material adverse effect on our business, financial condition and results of operations.
Public health crises, pandemics and epidemics and fear of such events may adversely impact our operations, the operations of our customers and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our services. Other effects of such public health crises, pandemics and epidemics may include significant volatility and disruption of the global financial markets; continued volatility of crude oil prices and related uncertainties around OPEC+ production; disruption of our operations, including suspension of drilling activities; impact to costs; loss of workers; labor shortages; supply chain disruptions or equipment shortages; logistics constraints; customer demand for our services and industry demand generally; capital spending by oil and natural gas companies; our liquidity; the price of our securities and trading markets with respect thereto; our ability to access capital markets; asset impairments and other accounting changes; certain of our customers experiencing bankruptcy or otherwise becoming unable to pay vendors, including us; and employee impacts from illness, travel restrictions, including border closures and other community response measures. Such public health crises, pandemics and epidemics are continuously evolving and the extent to which our business operations and financial results may be affected depends on various factors beyond our control, such as the duration, severity and sustained geographic resurgence of public health crises, pandemics and epidemics; the impact and effectiveness of governmental actions to contain and treat such outbreaks, including government policies and restrictions; vaccine hesitancy, vaccine mandates, and voluntary or mandatory quarantines; and the global response surrounding such uncertainties.
Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility with regard to the management of our personnel.
Outside of the U.S., we are often subject to collective bargaining agreements that require periodic salary negotiations, which usually result in higher personnel expenses and other benefits. Efforts have been made from time to time to unionize other portions of our workforce. In addition, we have been subjected to strikes or work stoppages and other labor disruptions in certain countries. Additional unionization efforts, new collective bargaining agreements or work stoppages could materially increase our costs, reduce our profitability or limit our flexibility.
Certain legal obligations require us to contribute certain amounts to retirement funds or other benefit plans and restrict our ability to dismiss employees. Future regulations or court interpretations established in the countries in which we conduct our operations could increase our costs and materially adversely affect our financial position, operating results or cash flows.
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Significant equipment or part shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could materially adversely affect our financial position, operating results or cash flows.
Our reliance on third-party suppliers, manufacturers and service providers to secure equipment, parts, components and sub-systems used in our operations exposes us to potential volatility in the quality, prices and availability of such items. Certain high-specification parts and equipment that we use in our operations may be available only from a small number of suppliers, manufacturers or service providers, or in some cases must be sourced through a single supplier, manufacturer or service provider. Industry consolidation has reduced and may continue to reduce the number of available suppliers, and our suppliers have been and may continue to be impacted by supply chain and logistics disruptions that began during the COVID-19 pandemic. A disruption in the deliveries from such third-party suppliers, manufacturers or service providers, capacity constraints, production disruptions, price increases, including those related to inflation and supply chain disruption, quality control issues, recalls or other decreased availability of parts and equipment could adversely affect our ability to meet our commitments to customers by making it cost prohibitive to do so, thus adversely impacting our operations and revenues and/or our operating costs. Delays in the delivery of critical drilling equipment could cause delays in the expected timing of rig reactivation, enhancement or upgrade projects, unscheduled operational downtime, our drilling rigs to be unavailable within the commencement window established by the operator in the contract and subject us to potential termination of the contract for such late delivery of the drilling rig.
Our operating and maintenance costs will not necessarily fluctuate in proportion to changes in our operating revenues.
Our operating and maintenance costs will not necessarily be proportional to changes in our operating revenues. Operating costs are affected by many factors, including inflation, while maintenance costs depend on, among other factors, market conditions for drilling services as well as unplanned downtime events or idle periods between contracts. Costs for operating a rig are therefore generally not correlated to the day rate being earned. As our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. Equipment maintenance costs fluctuate depending upon the age and condition of the equipment, and these costs could increase for short or extended periods as a result of new regulatory or customer requirements. Any of the foregoing could impact our liquidity or may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our Common Shares. In addition, certain of our drilling contracts are partially payable in local currency. The amounts, if any, of local currency received under these drilling contracts may exceed our local currency needs to pay local operating and maintenance costs, leading to an accumulation of excess local currency balances, which, in certain instances, may be subject to either restrictions or other difficulties in converting to U.S. dollars, our functional currency, or to other currencies of the locations where we operate. Excess amounts of local currency may also expose us to the risk of currency exchange losses.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on many factors beyond our control.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are beyond our control. Our business may not generate sufficient to provide for an efficient trading market or whether quotes for our ordinary shares will continue on this marketcash flow from operations in the future, which could result in significantly lower trading volumesour being unable to fund liquidity needs or repay indebtedness. A range of economic, business and reduced liquidity for investorsindustry factors will affect our financial performance, and many of these factors, such as the condition of our industry, the global economy and initiatives of our competitors, are beyond our control. If we do not generate enough cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as selling assets; reducing or delaying capital investments; seeking to buyraise additional capital; or sellrestructuring or refinancing all or a portion of our ordinary shares.indebtedness at or before maturity.
The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of diluted earnings per share using the treasury stock method. If we are unableour subsidiaries that may affect our ability to demonstrateoperate our intentbusiness and to settle the principal amount in cash, or are otherwise unable to utilize the treasury stock method, our diluted earnings per share would be adversely affected. See "Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional informationmake payments on our 2024 Convertible Notes.debt.
The Indenture, the Credit Agreement and the related agreements governing our indebtedness contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
•incur additional debt and issue preferred stock;
•incur or create liens;
•redeem and/or prepay certain debt;
•pay dividends on our shares or repurchase shares;
•make certain investments;
•engage in specified sales of assets;
•enter into transactions with affiliates; and
•engage in consolidation, mergers and acquisitions.
We have put in place arrangementsmay experience risks associated with our transfer agent to require that shares held in certificated form cannot be transferred into the DTC system until the transferorfuture mergers, acquisitions or dispositions of the shares has first delivered the shares to a depository specified by us so that SDRT may be collected in connection with the initial delivery to the depository. Any such shares will be evidenced by a receipt issued by the depository. Before the transfer can be registered in our share register, the transferor will also be required to provide the transfer agent sufficient funds to settle the resultant liability for SDRT, which will be charged at a rate of 1.5% of the value of the shares.businesses or assets or other strategic transactions.
Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court in the course of the Chapter 11 Cases.
In connection with the disclosure statement we filed with the Bankruptcy Court and the hearing to consider confirmation of the plan of reorganization, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the plan of reorganization and our ability to continue operations upon our emergence from the Chapter 11 Cases. Those projections were prepared solely for the purpose of the Chapter 11 Cases and have not been and will not be updated and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to then prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. We have not updated the projections prepared solely for the purpose of our Chapter 11 Cases or the assumptions on which they were based after our emergence. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks, and the assumptions underlying the projections or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
The exercise of all or any time thatnumber of outstanding warrants or the issuance or settlement of stock-based awards may dilute the holders of our shares are no longer eligibleCommon Shares.
On the Effective Date, we issued 75.0 million Common Shares and 5.6 million warrants to purchase 5.6 million Common Shares at an exercise price of $131.88 per share, exercisable for deposit, clearinga seven-year period commencing on the Effective Date. Additionally, on May 3, 2021, our board of directors approved and ratified the Valaris Limited 2021 Management Incentive Plan (the “MIP”) and reserved 9.0 million of our Common Shares for issuance under the MIP primarily for employees and directors. The grant and settlement services within its facilities, tradingof equity awards in such shares would be disrupted. In this event, DTC has agreed itthe future, any exercise of the warrants into Common Shares and any sale of Common Shares underlying outstanding warrants will provide us advance notice and assist us,have a dilutive effect to the extent possible, with efforts to mitigate adverse consequences. While we would pursue alternative arrangements to preserveholdings of our listingexisting shareholders and maintain trading, any such disruption could have a material adverse effect on the tradingmarket for our Common Shares, including the price of our Class A ordinary shares.that an investor could obtain for their Common Shares.
Regulatory, Legal Regulatory and Tax Risks
Failure to comply with anti-corruption and anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, could result in fines, criminal penalties, drilling contract terminations and an adverse effect onmaterially adversely affect our business.financial position, operating results or cash flows.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption and are subject to the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), the U.S. Treasury Department'sDepartment’s Office of Foreign Assets Control ("OFAC"(“OFAC”) regulations, the U.K. Bribery Act ("UKBA"(“UKBA”), other U.S. laws and regulations governing our international operations and similar laws in other countries.
Any violation of the FCPA, OFAC regulations, the UKBA or other applicable anti-corruption laws by us, our partners, agents and our and their respective affiliated entities or their respective officers, directors, employees and agents could in some cases provide a customer with termination rights and other remedies under the terms of their contracts(s) with us and also result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and could materially adversely affect our financial condition, operating results or cash flows or the availability of funds under our revolving credit facility.flows. Further, we may incur significant costs and consume significant internal resources in our efforts to detect, investigate and resolve actual or alleged violations.
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Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations and reduce demand.demand for our services.
The offshore contract drilling industry is dependent on demand for services from the oil and natural gas industry. Accordingly, we will be directly affected by the approval and adoption of laws and regulations limiting or curtailing exploration and development drilling for oil and natural gas for economic, environmental, safety and other policy reasons. Furthermore, we may be required to make significant capital expenditures or incur substantial additional costs to comply with new governmental laws and regulations. It is also possible that legislative and regulatory activity could materially adversely affect our operationsfinancial position, operating results or cash flows by limiting drilling opportunities or significantly increasing our operating costs. Increases in regulatory requirements, particularly in the U.S. Gulf of Mexico, could significantly increase our costs.opportunities. In recent years, we have seen several significant regulatory changes that have affected the way we operate in the U.S. Gulf of Mexico.
See
Any new or additional regulatory, legislative, permitting or certification requirements in the U.S., and other areas in which we operate, including laws and regulations that have or may impose increased financial responsibility, oil spill abatement contingency plan capability requirements, or additional operational requirements and certifications, could materially adversely affect our financial position, operating results or cash flows.
We anticipate that government regulation in other countries where we operate may follow the U.S. in regard to enhanced safety and environmental regulation, which could also result in governments imposing sanctions on contractors when operators fail to comply with regulations that impact drilling operations. Even if not a requirement in these countries, most international operating companies, and many others, are voluntarily complying with some or all of the U.S. inspections and safety and environmental guidelines when operating outside the U.S. Such additional governmental regulation and voluntary compliance by operators could increase the cost of our operations and expose us to greater liability.
Compliance with or breach of environmental laws can be costly and could limit our operations.
Our operations are subject to laws and regulations controlling the discharge of materials into the environment, pollution, contamination and hazardous waste disposal or otherwise relating to the protection of the environment. Environmental laws and regulations specifically applicable to our business activities could impose significant liability on us for damages, clean-up costs, fines and penalties in the event of oil spills or similar discharges of pollutants or contaminants into the environment or improper disposal of hazardous waste generated in the course of our operations. To date, such laws and regulations have not had a material adverse effect on our operating results, and we have not experienced an accident that has exposed us to material liability arising out of or relating to discharges of pollutants into the environment. However, the legislative, judicial and regulatory response to a well incident could substantially increase our and our customers'customers’ liabilities. In addition to potential increased liabilities, such legislative, judicial or regulatory action could impose increased financial, insurance or other requirements that may adversely impact the entire offshore drilling industry. See“Item 1. Business – Governmental Regulations and Environmental Matters” and “Item 3. Legal Proceedings – Environmental Matters.”
regulations that have and may further impact our operations. From time to time, legislative and regulatory proposals have been introduced that would materially limit or prohibit offshore drilling in certain areas, or that would increase the liabilities or costs associated with offshore drilling. If new laws are enacted, or if government actions are taken that restrict or prohibit offshore drilling in our principal areas of operation or that impose environmental or other requirements that materially increase the liabilities, financial requirements or operating or equipment costs associated with offshore drilling, exploration, development, or production of oil and natural gas, our financial position, operating results or cash flows could be materially adversely affected.
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The IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes.
Although Valaris plcLimited is incorporated in the United KingdomBermuda (and thus would generally be considered a “foreign” corporation (or non-U.S. tax resident)), the U.S. Internal Revenue Service (“IRS”) mayIRS could assert that we should be treated as a U.S. corporation (and U.S. tax resident) pursuant to the rules under Section 7874 of the Internal Revenue Code (including as a result of the Atwood acquisition completed in 2017).Code. While we do not believe we are a U.S. corporation pursuant to these rules, the rules are complex and the determination is subject to
factual uncertainties. If the IRS successfully challenged our status as a foreign corporation, significant adverse tax consequences would result for us and for certain of our shareholders.
Governments may pass laws that subject us to additional taxation or may challenge our tax positions.
There is increasing uncertainty with respect to tax laws, regulations and treaties, and the interpretation and enforcement thereof that may affect our business. TheFor example, the Organization for Economic Cooperation and Development (“OECD”) has issued its final reports on base erosion, the European Union, and profit shifting, which generally focus on situations where profits are earnedcertain other countries (including countries in low-tax jurisdictions, or payments are made between affiliates from jurisdictions with high tax rates to jurisdictions with lower tax rates. Certain countries within which we operate have recently enactedoperate) are committed to enacting substantial changes to theirnumerous long-standing tax lawsprinciples impacting how large multinational enterprises are taxed. In particular, the OECD’s Pillar Two initiative introduces a 15% global minimum tax applied on a country-by-country basis and for which many jurisdictions committed to an effective enactment date starting January 1, 2024, though not all jurisdictions were expected to meet this target deadline. The impact of these potential new rules as well as any other changes in response to the OECD recommendations or otherwisedomestic and theseinternational tax rules and other countries may enact changes to their tax laws or practices in the future (prospectively or retroactively), which mayregulations could have a material adverse effect on our financial position, operating results or cash flows. U.S. federal incomeeffective tax reform legislation enacted in late 2017 introduced significant changes to U.S. income tax law, including a reduction in the statutory income tax rate from 35% to 21%, a one-time transition tax on deemed repatriation of deferred foreign income, a base erosion anti-abuse tax that effectively imposes a minimum tax on certain payments to non-U.S. affiliates, new and revised rules relating to the current taxation of certain income of foreign subsidiaries and revised rules associated with limitations on the deduction of interest.rate.
In addition, our tax positions are subject to audit by U.K., U.S. and other foreign tax authorities. Such tax authorities may, and do from time to time, disagree with our interpretations or assessments of the effects of tax laws, treaties or regulations or their applicability to our corporate structure or certain transactions we have undertaken. We currently are subject to tax assessments in various jurisdictions, which we are contesting. Even if we are successful in maintaining our tax positions, we may incur significant expenses in defending our positions and contesting claims asserted by tax authorities. If we are unsuccessful in defending our tax positions, the resulting assessments or rulings could significantly impact our consolidated income taxes in past or future periods.
As required by law, we file periodic tax returns that are subject to review and examination by various revenue agencies within the jurisdictions in which we operate. We are currently subject to tax assessments in various jurisdictions, which we are contesting.
As a result of these uncertainties, as well as changes in the administrative practices and precedents of tax authorities or other matters, (suchsuch as changes in applicable accounting rules)rules, that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements, we cannot provide any assurances as to what our consolidated effective income tax rate will be in future periods. If we are unable to mitigate the negative consequences of any change in law, audit or other matters, this could cause our consolidated income taxes to increase and cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
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Our consolidated effective income tax rate may vary substantially over time.
We cannot provide any assurances as to what our future consolidated effective income tax rate will be because of, among other matters, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as potential changes in U.K., U.S. and other foreign tax laws, regulations or treaties or the interpretation or enforcement thereof, changes in the
administrative practices and precedents of tax authorities or other matters (such as changes in applicable accounting rules) that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements. In addition, as a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in the overall level of our income and changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionately with income. Further, we may continue to incur income tax expense in periods in which we operate at a loss. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries.subsidiaries, which may result in the imposition of transaction taxes, which could be material. If we are unable to mitigate the negative consequences of any change in law, audit, business activity or other matters, this could cause our consolidated effective income tax rate to increase and cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
We are, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, toxic tort claims, environmental claims or proceedings, employment matters, issues related to employee or representative conduct, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of civilour business. Although we intend to defend or pursue such matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation. Litigation could materially adversely affect our financial position, operating results or cash flows because of potential negative outcomes, legal fees, the allocation of management’s time and attention, and other factors.
We could also face increased climate-related litigation with respect to our operations both in the U.S. and around the world. Governmental and other entities in various states, such as California and New York, have filed lawsuits against coal, oil and natural gas companies. These suits allege damages as a result of climate change, and the plaintiffs are seeking unspecified damages and abatement under various legal theories. Similar lawsuits may be filed in other jurisdictions both in the U.S. and globally. Although we are not currently a party to any such lawsuit, these suits present uncertainty regarding the extent to which companies who are not producing oil or natural gas, but who are engaged to provide services to support production activities, such as offshore drilling companies, face an increased risk of liability stemming from climate-related litigation, which risk would also adversely impact the oil and natural gas industry and impact demand for our services.
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We are a Bermuda company and it may be difficult to enforce judgments against us may be more difficult.or our directors and executive officers.
Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
Provisions in our bye-laws could delay or prevent a change in control of our company, which could materially adversely affect the price of our Common Shares.
Some of the provisions in our bye-laws could delay or prevent a change in control of our company that a shareholder may consider favorable, which could materially adversely affect the price of our Common Shares. Certain provisions of our bye-laws could make it more difficult (or impossible)for a third party to bring some typesacquire control of claims against us in courts in England than itour company, even if the change of control would be beneficial to bring similar claims againstour shareholders. These provisions include:
•authority of our board of directors to determine its size;
•the ability of our board of directors to issue preferred shares without shareholder approval;
•limitations on the removal of directors; and
•limitations on the ability of our shareholders to act by written consent in lieu of a U.S. companymeeting.
In addition, our bye-laws establish advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders.
Legislation enacted in Bermuda as to Economic Substance may affect our operations.
The Economic Substance Act came into effect in Bermuda on January 1, 2019. This law requires a U.S. court.registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside Bermuda that carries as a business any one or more of the “relevant activities” must comply with economic substance requirements. The Economic Substance Act may require in-scope Bermuda entities, which are engaged in such “relevant activities,” to be directed and managed in Bermuda, have an adequate level of qualified employees in Bermuda, incur an adequate level of annual expenditure in Bermuda, maintain physical offices and premises in Bermuda or perform core income-generating activities in Bermuda. The list of “relevant activities” includes carrying on any one or more of: banking, insurance, fund management, financing and leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities. The Economic Substance Act could affect the manner in which we operate our business. To the extent we or any of our Bermuda subsidiaries carry on any relevant activities for the purposes of the Economic Substance Act, we or such subsidiaries will be required to comply with such economic substance requirements. Our compliance with the Economic Substance Act
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may result in additional costs that could have a material adverse effect on our financial position or results of operations.
Our business could be affected as a result of activist investors.
Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as actions related to environment, social and governance (“ESG”)sustainability matters, financial restructuring, increased borrowing, dividends, share repurchases or even sales of assets or even the entire company. Responding to proxy contests and other actions by such activist investors or others in the future could be costly and time-consuming, disrupt our operations and divert the attention of our Boardboard of Directorsdirectors and senior management from the pursuit of our business strategies, which could materially adversely affect our financial position, operating results of operations and financial condition.or cash flows. Additionally, perceived uncertainties as to our future direction as a result of investor activism or changes to the composition of the Boardboard of Directorsdirectors may lead to the perception of a change in the direction of our business, instability or lack of continuity, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our revenue, earnings andfinancial position, operating results or cash flows could be materially adversely affected. In addition, the trading price of our shares could experience periods of increased volatility as a result of investor activism.
Risks Related to Our International Operations:Operations
Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Revenues from non-U.S. operations were 83%80%, 85%78%, 87% and 87%81% of our total consolidated revenues during 2020, 2019for the years ended December 31, 2023 and 2018,2022, and eight months ended December 31, 2021 (Successor) and for four months ended April 30, 2021 (Predecessor), respectively. Our non-U.S. operations and shipyard rig construction and enhancement projects are subject to political, economic and other uncertainties, including:
•terrorist acts, war and civil disturbances,
•expropriation, nationalization, deprivation or confiscation of our equipment or our customer'scustomer’s property,
•repudiation or nationalization of contracts,
•assaults on property or personnel,
•piracy, kidnapping and extortion demands,
•significant governmental influence over many aspects of local economies and customers,
•unexpected changes in law and regulatory requirements, including changes in interpretation or enforcement of existing laws,
•work stoppages, often due tosuch as labor strikes, over which we have little or no control,
•complications associated with repairing and replacing equipment in remote locations,
•limitations on insurance coverage, such as war risk coverage, in certain areas,
•imposition of trade barriers,
•wage and price controls,
•import-export quotas,
•exchange restrictions,
•uncertainty or instability resulting from hostilities or other crises in the Middle East, West Africa, Latin America, Southeastern Asia, Eastern Europe or other geographic areas in which we operate,
•changes in the manner or rate of taxation,
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•limitations on our ability to recover amounts due,
•increased risk of government and vendor/supplier corruption,
•increased local content requirements,
•the occurrence or threat of epidemic or pandemic diseases (including the COVID-19 pandemic) and any government response to such occurrence or threat,
•changes in political conditions, and
•other forms of government regulation and economic conditions that are beyond our control.
We historically have maintained insurance coverage and obtained contractual indemnities that protect us from some, but not all, of the risks associated with our non-U.S. operations such as nationalization, deprivation, expropriation, confiscation, political and war risks. However, there can be no assurance that any particular type of contractual or insurance protection will be available in the future or that we will be able to purchase our desired level of insurance coverage at commercially feasible rates. Moreover, we may initiate a self-insurance program through one or more captive insurance subsidiaries. In circumstances where we have insurance protection for some or all of the risks sometimes associated with non-U.S. operations, such insurance may be subject to cancellation on short notice, and it is unlikely that we would be able to remove our rig or rigs from the affected area within the notice period. Accordingly, a significant event for which we are uninsured, underinsured or self-insured, or for
which we have not received an enforceable contractual indemnity from a customer, could cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
We are subject to various tax laws and regulations in substantially all countries in which we operate or have a legal presence. Actions by tax authorities that impact our business structures and operating strategies, such as changes to tax treaties, laws and regulations, or the interpretation or repeal of any of the foregoing or changes in the administrative practices and precedents of tax authorities, adverse rulings in connection with audits or otherwise, or other challenges may have a material impact on our tax expense.
Our non-U.S. operations are also subject to various laws and regulations in the countries in which we operate, including laws and regulations relating to the operation of drilling rigs and the requirements for equipment. We may be required to make significant capital expenditures to operate in such countries, which may not be reimbursed by our customers. Governments in some countries have become increasinglyare active in regulating and controlling the ownership of oil, natural gas and mineral concessions and companies holding such concessions, the exploration of oil and natural gas and other aspects of the oil and natural gas industry in their countries. In some areas of the world, government activity has materially adversely affected the amount of exploration and development work performed by major international oil companies and may continue to do so. Moreover, certain countries accord preferential treatment to local contractors or joint ventures or impose specific quotas for local goods and services, which can increase our operational costs and place us at a competitive disadvantage. There can be no assurance that such laws and regulations or activities will not have a material adverse effect onmaterially adversely affect our future operations.financial position, operating results or cash flows.
The shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by specific customs laws and regulations in each of the countries where we operate. Moreover, many countries, including the United States,U.S., control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose express or de facto economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities.
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The laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and constantlyfrequently changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which are outside our control and some of which may result from failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled
operational downtime, reduced day rates during such downtime and contract cancellations. Any failure to comply with applicable legal and regulatory trading obligations also could result in criminal and civil penalties and sanctions, such as fines, imprisonment, exclusion from government contracts, seizure of shipments and loss of import and export privileges.
Our partners, agents and our and their respective affiliated entities or respective officers, directors, employees contractors and agents may take actions in violation of our policies and procedures designed to promote compliance with the laws of the jurisdictions in which we operate. Any such violation could have a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
Regulation of GHG and climate change could have a negative effectimpact on economic conditions, financial markets and our business.
In addition to potential impacts on our business resulting from climate-change legislation or cash flows. Approximately 15%regulations, our business also could be materially adversely affected by climate-change related physical changes, such as changing weather patterns. An increase in severe weather patterns could result in damage to or loss of our total revenues were generateddrilling rigs, impact our ability to conduct our operations and/or result in a disruption of our customers’ operations. Finally, increasing attention to the U.K. forrisks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their GHG emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which could be imposed without regard to the year ended December 31, 2020.causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of GHG emissions-related agreements, legislation and measures on our financial performance is highly uncertain because we are unable to predict, in a multitude of jurisdictions, the outcome of political decision-making processes.
Consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition, may lead to reduced demand for our services.
The increasing penetration of renewable energy into the energy supply mix, the increased production of electric-powered vehicles and improvements in energy storage, as well as changes in consumer preferences, including increased consumer demand for alternative fuels, energy sources and electric-powered vehicles may materially adversely affect the demand for oil and natural gas and our drilling services. This evolving transition of the global energy system from fossil-based systems of energy production and consumption to more renewable energy sources, commonly referred to as the energy transition, could have a material adverse impact on our results of operations, financial position and cash flows. As a result of changes in consumer preferences and uncertainty regarding the pace of the energy transition and expected impacts on oil and natural gas demand, some of our customers are transitioning their businesses to renewable energy projects and away from oil and natural gas exploration and production, which may result in reduced capital spending by such customers on oil and natural gas projects and in turn reduced demand for our services.
Increased scrutiny from stakeholders and others regarding climate change, as well as our sustainability practices, initiatives and reporting responsibilities, could result in additional costs or risks.
In recent years the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds, has promoted the divestment of fossil fuel equities and pressured lenders to cease or limit funding to companies engaged in the extraction of fossil fuel reserves. Such initiatives could ultimately interfere with our access to capital, business activities and operations.
In addition to such initiatives, sustainability matters more generally have been the subject of increased focus by investors, customers, investment funds, political advocacy groups, and other market and industry participants, as well as certain regulators, including in the U.S. and the EU. We publish an annual Sustainability Report, which includes disclosure of our sustainability practices, aspirations, targets and goals. Our disclosures on these matters rely on management’s expectations as of the date the statements are first made, as well as standards for measuring progress that are still in development and may change or fail to be realized. These expectations and standards may continue to evolve. Even so, our failure or inability to meet these targets, goals or evolving stakeholder expectations for sustainability practices and reporting and even the perception of such failure or inability may potentially harm our reputation and impact employee retention, customer relationships and access to capital, among other matters. For example, certain market participants use third-party benchmarks or scores to measure a company’s sustainability practices in making investment decisions and customers and suppliers may evaluate our sustainability practices or require that we adopt certain sustainability policies as a condition of awarding contracts. By electing to set and share publicly our corporate sustainability standards, our business may face increased scrutiny related to sustainability activities and be unable to satisfy all stakeholders. For example, some stakeholders and regulators have expressed or pursued opposing views, legislation, and investment expectations with respect to sustainability. As sustainability best-practices and voluntary or mandatory reporting standards continue to develop, we may incur increased costs related to sustainability monitoring and reporting and complying with sustainability initiatives, especially to the extent these standards are not harmonized or consistent. In addition, it may be difficult or expensive for us to comply with any sustainability-linked contracting policies adopted by customers and suppliers,
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particularly given the complexity of our supply chain, our reliance on third-party manufacturers, and the potential for jurisdictions in which we operate to enact opposing or incompatible regulations. Actions we may take to achieve our sustainability initiatives, including the development and implementation of new emissions-reduction technology, may require increased expenditures, which may materially adversely affect our financial position, operating results or cash flows.
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Item 1B. Unresolved Staff Comments
None.
Item 1C.Cybersecurity
We have a cybersecurity program to assess, identify, and manage risks from cybersecurity threats. The Company’s cybersecurity program includes administrative, technical, and physical safeguards that address our information systems, including our IT and operational technology environments. The program is designed to ensure the confidentiality, security, integrity, and availability of those systems and the information residing therein.
Strategy and Risk Management:
Our cybersecurity strategy leverages administrative safeguards that include policies, procedures, and processes to assess, identify, and manage risks from cybersecurity threats. We have adopted a Cybersecurity Incident Response Policy (the “CIRP”), which provides a framework and guidance for investigating, containing, documenting and mitigating incidents, including reporting findings and keeping senior management and other key stakeholders informed and involved as appropriate.
Additionally, all of the Company’s employees undertake an annual cybersecurity training program on how to identify characteristics of various cybersecurity threats, which is augmented by additional training and communications on IT and cybersecurity matters throughout the year. Periodically during the year, the Company’s IT department leads simulations of cybersecurity incidents with employees to test the organization’s ability to respond to a variety of cybersecurity-related scenarios.
Our policies, procedures, and processes are aligned with our technical tools, which include continuous security monitoring and alerting, an AI-based tool to facilitate cybersecurity incident identification and remediation, and other technologies, to ensure the security of our systems and information. We also have implemented certain physical safeguards, such as restricted access to areas containing critical IT and operational technology equipment, to mitigate risks to our physical environment.
Cybersecurity is integrated into our enterprise risk management ("ERM") process. Cybersecurity-related risks are included in our ERM risk register, which are reviewed by internal stakeholders who designate the relative level of severity of identified risks. The ERM risk register, which includes any identified cybersecurity-related risks, is reviewed by our Executive Management Committee and is reported quarterly to the board of directors, who then reviews the identified risks, mitigation plans and monitoring reports and provides oversight as appropriate.
Oversight:
The Audit Committee is responsible for, and actively engaged in, the oversight of our IT and cybersecurity program, including the oversight of risks from cybersecurity threats. All members of the Audit Committee have prior work experience relating to cybersecurity or have obtained a certification or degree in cybersecurity. The Audit Committee, at least quarterly, receives reports from the Company’s Senior Director – Information Technology (“SDIT”) on, among other things, the Company’s cybersecurity incidents, risks and measures, training and organizational readiness. The board of directors is kept apprised of cybersecurity risk matters, including through participation in the quarterly cybersecurity briefings to the Audit Committee that are described above. We have protocols by which certain cybersecurity incidents are escalated within the Company and, where appropriate, reported in a timely manner to the board of directors and Audit Committee.
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At the management level, the SDIT and his team are responsible for leading enterprise-wide information security strategy, policy, standards, architecture and processes, including the assessment and management of material risks from cybersecurity threats. The Company’s SDIT reports to the Chief Financial Officer. The SDIT has extensive cybersecurity knowledge and skills, gained from over 25 years of relevant work experience. The SDIT is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents in accordance with the CIRP and policies and procedures, which may include reports from the IT team. The SDIT also regularly reviews risk management measures implemented by the Company to identify and mitigate cybersecurity risks.
Third Parties and Assessments:
We engage third-party service providers in various capacities to enhance our internal cybersecurity capabilities. The Company engages consultants to assist with cybersecurity assessments, including with respect to cloud security and network vulnerability testing. Internal Audit, along with other internal stakeholders, including IT, determine the Company’s need for cybersecurity assessments in conjunction with an annual cybersecurity risk assessment process.
Further, pursuant to our CIRP, we have engaged third-party support under a retainer agreement to enable an effective and timely response to a significant cybersecurity incident.
In addition to assessing our own cybersecurity preparedness, we also consider and evaluate cybersecurity risks associated with use of third-party service providers. We obtain Systems and Organization Controls ("SOC") 1 and SOC 2 reports, as applicable, from our third-party service providers which assess those entities' controls to cover security, availability, integrity, confidentiality and privacy. Any applicable findings of this third-party assessment are analyzed by the appropriate employees and further action is taken as needed.
Impact of Cybersecurity Risks and Threats:
While we have not experienced any material cybersecurity threats or incidents as of the date of this Annual Report on Form 10-K, there can be no guarantee that we will not be the subject of future successful attacks, threats or incidents. Additional information on cybersecurity risks we face is discussed in “Item 1A. Risk Factors,” which should be read in conjunction with the foregoing information.
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Item 2. Properties
Contract Drilling Fleet
The following table provides certain information about the rigs in our drilling fleet as of February 22, 2021:15, 2024:
Rig Name | Rig Type | Year Delivered | Design | Maximum Water Depth/ Drilling Depth | Location | Status | |||||||||||||||||||||||||||||
| Floaters | |||||||||||||||||||||||||||||||||||
| VALARIS DS-4 | Drillship | 2010 | Dynamically Positioned | 12,000'/40,000' | Brazil | ||||||||||||||||||||||||||||||
| VALARIS DS-7 | Drillship | 2013 | Dynamically Positioned | 10,000'/40,000' | Spain | ||||||||||||||||||||||||||||||
| VALARIS DS-8 | Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Brazil | ||||||||||||||||||||||||||||||
| VALARIS DS-9 | Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Angola | ||||||||||||||||||||||||||||||
| VALARIS DS-10 | Drillship | 2017 | Dynamically Positioned | 12,000'/40,000' | Nigeria | Under contract | |||||||||||||||||||||||||||||
| VALARIS DS-11 | Drillship | 2013 | Dynamically Positioned | 12,000'/40,000' | Spain | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS DS-12 | Drillship | 2013 | Dynamically Positioned | 12,000'/40,000' | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DS-13 | Drillship | 2023 | Dynamically Positioned | 12,000'/40,000' | |||||||||||||||||||||||||||||||
| VALARIS DS-14 | Drillship | 2023 | Dynamically Positioned | 12,000'/40,000' | |||||||||||||||||||||||||||||||
| VALARIS DS-15 | Drillship | 2014 | Dynamically Positioned | 12,000'/40,000' | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DS-16 | Drillship | 2014 | Dynamically Positioned | 12,000'/40,000' | |||||||||||||||||||||||||||||||
| Gulf of Mexico | Under contract | ||||||||||||||||||||||||||||||||||
| VALARIS | Drillship | 2014 | Dynamically Positioned | 12,000'/40,000' | Brazil | Under contract | |||||||||||||||||||||||||||||
| VALARIS DS-18 | Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Gulf of Mexico | Under contract | |||||||||||||||||||||||||||||
| VALARIS DPS-1 | Semisubmersible | Dynamically Positioned | 10,000'/35,000' | Australia | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DPS-3 | Semisubmersible | 2010 | Dynamically Positioned | 8,500'/37,500' | Gulf of Mexico | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS | Semisubmersible | 2012 | Dynamically Positioned | 8,500'/35,000' | Under contract | ||||||||||||||||||||||||||||||
| VALARIS | Semisubmersible | 2012 | Dynamically Positioned | 8,500'/35,000' | Gulf of Mexico | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS | |||||||||||||||||||||||||||||||||||
| Semisubmersible | 2011 | F&G ExD Millennium, Moored | 8,200'/40,000 | Australia | Under contract | ||||||||||||||||||||||||||||||
| Jackups | |||||||||||||||||||||||||||||||||||
| VALARIS | Jackup | 1981 | |||||||||||||||||||||||||||||||||
| Hitachi K1025N | 225'/25,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||||||||
| VALARIS | Jackup | 1999 | MLT Super 116-C | 400'/30,000' | Gulf of Mexico | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS | Jackup | 2000 | MLT Super 116-C | 350'/30,000' | Saudi Arabia | ||||||||||||||||||||||||||||||
| VALARIS | Jackup | 1982 | MLT 116-C | 210'/25,000' | United Kingdom | Under contract | |||||||||||||||||||||||||||||
| VALARIS | Jackup | ||||||||||||||||||||||||||||||||||
| KFELS MOD V-A | 400'/30,000' | ||||||||||||||||||||||||||||||||||
Rebuilt | Water Depth/ Drilling Depth | |||||||||||||||||||||||||||||||
| Gulf of Mexico | Preservation stacked(1) | |||||||||||||||||||||||||||||||
| VALARIS | Jackup | 2002 | KFELS MOD V-B | 400'/30,000' | UAE | Preservation stacked(1) | ||||||||||||||||||||||||||
| VALARIS 106 | 2005 | KFELS MOD V-B | 400'/30,000' | Indonesia | ||||||||||||||||||||||||||||
| VALARIS 107 | Jackup | 2006 | KFELS MOD V-B | 400'/30,000' | Australia | |||||||||||||||||||||||||||
| VALARIS 108 | Jackup | 2007 | KFELS MOD V-B | 400'/30,000' | Saudi Arabia | Preparing for lease contract(4) | ||||||||||||||||||||||||||
| VALARIS 109 | Jackup | 2008 | KFELS MOD V-Super B | 350'/35,000' | Namibia | Preservation stacked(1) | ||||||||||||||||||||||||||
| VALARIS 110 | Jackup | 2015 | KFELS MOD V-B | 400'/35,000' | Qatar | Under contract | ||||||||||||||||||||||||||
| VALARIS 111 | Jackup | 2003 | KFELS MOD V Enhanced B-Class | 400'/36,000' | Croatia | Preservation stacked(1) | ||||||||||||||||||||||||||
| VALARIS 115 | Jackup | 2013 | Baker Marine Pacific Class 400 | 400'/30,000' | Brunei | Under contract | ||||||||||||||||||||||||||
| VALARIS 116 | Jackup | 2008 | LT 240- C | 375'/35,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||
| VALARIS | Jackup | 2009 | LT 240- C | 350'/35,000' | Mexico | |||||||||||||||||||||||||||
| VALARIS 118 | Jackup | 2012 | LT 240- C | 350'/35,000 | Trinidad | Under contract | ||||||||||||||||||||||||||
| VALARIS 120 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
| VALARIS 121 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
| VALARIS 122 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
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| Rig Name | Rig Type | Year Delivered | Design | Maximum Water Depth/ Drilling Depth | Location | Status | |||||||||||||||||||||||||||||
| Jackups (Continued) | |||||||||||||||||||||||||||||||||||
| VALARIS 123 | Jackup | 2019 | KFELS Super A | 400'/40,000' | United Kingdom | Preparing for contract | |||||||||||||||||||||||||||||
| VALARIS 140 | Jackup | 2016 | LT Super | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS | Jackup | LT Super | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||||
| VALARIS | Jackup | 2010 | LT EXL Super 116-E | 350'/35,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||
| VALARIS 144 | Jackup | 2010 | LT Super 116-E | 350'/35,000' | Gulf of Mexico | Under contract | |||||||||||||||||||||||||||||
| VALARIS 145 | Jackup | 2010 | LT Super 116-E | 350'/35,000' | Gulf of Mexico | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS 146 | Jackup | 2011 | LT EXL Super 116-E | 320'/35,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||
| VALARIS 147 | Jackup | 2013 | LT Super 116-E | 350'/30,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||
| VALARIS 148 | Jackup | 2013 | LT Super 116-E | 350'/30,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||
| VALARIS 247 | Jackup | 1998 | LT Super Gorilla | 400'/35,000' | United Kingdom | ||||||||||||||||||||||||||||||
| VALARIS | Jackup | 2000 | LT Super Gorilla | 400'/35,000' | United Kingdom | Under contract | |||||||||||||||||||||||||||||
| VALARIS | Jackup | 2001 | LT Super Gorilla | 400'/35,000' | Trinidad | Under contract | |||||||||||||||||||||||||||||
| VALARIS 250 | Jackup | 2003 | LT Super Gorilla XL | 550'/35,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||
| VALARIS Viking | Jackup | 2010 | KEFLS N Class | 435'/35,000' | United Kingdom | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS | Jackup | ||||||||||||||||||||||||||||||||||
| 2011 | KEFLS N Class | ||||||||||||||||||||||||||||||||||
| VALARIS | Jackup | 2011 | KEFLS N Class | 400'/35,000' | |||||||||||||||||||||||||||||||
| Under contract | |||||||||||||||||||||||||||||||||||
(1)Prior to stacking, upfront steps are taken to preserve the rig. This may include a quayside power source to dehumidify key equipment and/or provide electric current to the hull to prevent corrosion. Also, certain equipment may be removed from the rig for storage in a temperature-controlled environment. While stacked, large equipment that remains on the rig is periodically inspected and maintained by Valaris personnel. These steps are designed to reduce time and lower cost to reactivate the rig when market conditions improve.once returned to the active fleet.
(2)The Amended RSA provides that on or before the effective date of the reorganization, the construction contractsRig is being reactivated for these rigs shall be rejected under Section 365 of the Bankruptcy Code, unless otherwise agreed between the shipyard and the Company with the consent of required Consenting Noteholders. If rejected, it is contemplated that we would have to pay an amount equal to the liquidation recovery, which is the amount the contract counterparty would be entitled to receive or retain if the applicable Company entity was liquidated under chapter 7 of the Bankruptcy Code. Prior to December 31, 2020, a Stipulation was filed with the Bankruptcy Court which included an Assumption Term Sheet stating amended terms of these construction agreements.firm contract.
The equipment on our drilling rigs includes engines, draw works, derricks, pumps to circulate drilling fluid, well control systems, drill string and related equipment. The engines power a top-drive mechanism that turns the drill string and drill bit so that the hole is drilled by grinding subsurface materials, which are then returned to the rig by the drilling fluid. The intended water depth, well depth and geological conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling project.
Floater rigs consist of drillships and semisubmersibles. Drillships are purpose-built maritime vessels outfitted with drilling apparatus. Drillships are self-propelled and can be positioned over a drill site through the use of a computer-controlled propellerpropellers or "thruster" dynamic positioning systems. Our drillships are capable of drilling in water depths of up to 12,000 feet and are suitable for deepwater drilling in remote locations because of their superior mobility and large load-carrying capacity. Although drillships are most often used for deepwater drilling and exploratory well drilling, drillships can also be used as a platform to carry out well maintenance or completion work such as casing and tubing installation or subsea tree installations.
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Semisubmersibles are drilling rigs with pontoons and columns that are partially submerged at the drilling location to provide added stability during drilling operations. Semisubmersibles are held in a fixed location over the ocean floor either by being anchored to the sea bottom with mooring chains or dynamically positioned by computer-controlled propellers or "thrusters" similar to that used by our drillships. Moored semisubmersibles are most commonly used for drilling in water depths of 4,499 feet or less. However, VALARIS MS-1, which is a moored semisubmersible, is capable of deepwater drilling in water depths greater than 5,000 feet. Dynamically positioned semisubmersibles generally are outfitted for drilling in deeper water depths and are well-suited for deepwater development and exploratory well drilling. Further, we have two hybrid semisubmersibles, VALARIS 8503DPS-3 and VALARIS 8505,DPS-5, which leverage both moored and dynamically positioned configurations. This hybrid design provides multi-faceted drilling solutions to customers with both shallow water and deepwater requirements.
Jackup rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected leg supports. Jackups are generally preferred over other rig types in shallow water depths of 400 feet or less, primarily because jackups provide a more stable drilling platform with above water well-control equipment. Our jackups are of the independent leg design where each leg can be fixed into the ocean floor at varying depths and equipped with a cantilever that allows the drilling equipment to extend outward from the hull over fixed platforms enabling safer drilling of both exploratory and development wells. The jackup hull supports the drilling equipment, jacking system, crew quarters, storage and loading facilities, helicopter landing pad and related equipment and supplies.
We lease various office, warehouse and storage facilities worldwide, including our executivecorporate offices in London, EnglandHouston, Texas and other offices and facilities located in addition to office spacevarious countries in Houston, Aberdeen, Indonesia, Malaysia, Mexico, Brazil, Trinidad, Nigeria, The Netherlands, Saudi Arabia, Thailand,North America, South America, Europe, Africa and Norway.the Asia Pacific region. We own offices and other facilities in Louisiana,United States (Louisiana), Angola Australia, Aberdeen and Brazil.
Item 3. Legal Proceedings
Environmental Matters
We are currently subject to pending notices of assessment relating to spills of drilling fluids, oil, brine, chemicals, grease or fuel from drilling rigs operating offshore Brazil from 2008 to 2017,2019, pursuant to which the governmental authorities have assessed, or are anticipated to assess, fines. We have contested these notices and appealed certain adverse decisions and are awaiting decisions in these cases. Although we do not expect final disposition of these assessments to have a material adverse effect on our financial position, operating results and cash flows, there can be no assurance as to the ultimate outcome of these assessments. A $482,000$0.4 million liability related to these matters was included in accruedAccrued liabilities and other on our consolidated balance sheetConsolidated Balance Sheet as of December 31, 2020.2023 included in "Item 8. Financial Statements."
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the
outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.
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Item 4. Mine Safety Disclosures
Not applicable.
PART II
| Item 5. | Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | ||||
Market Information
On April 30, 2021, pursuant to the plan of reorganization, the Chapter 11 CasesCompany issued an aggregate of approximately 75.0 million Common Shares and in accordance with Section 802.01D of5.6 million Warrants and has listed the Common Shares and the Warrants on the NYSE Listed Company Manual, on August 19, 2020, we were notified by NYSE of its determination to indefinitely suspend trading of the Company’s Class A ordinary shares and to commence proceedings to delist the Company’s Class A ordinary shares from the NYSE. Our Class A ordinary shares were delisted from the NYSE effective September 14, 2020. Since that time, the shares have been quoted on the OTC Pink Open Market under the symbol “VALPQ.” We can provide no assurance that our ordinary shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our ordinary shares on this market, whether the trading volume of our ordinary shares will be sufficient to provide for an efficient trading market or whether quotes for our ordinary shares will continue on this market in the future. These recent developments could result in significantly lower trading volumessymbols “VAL” and reduced liquidity for investors seeking to buy or sell shares of our ordinary shares.“VAL WS”, respectively.
Many of our shareholders hold shares electronically, all of which are owned by a nominee of DTC.the Depository Trust Company. We had 20467 shareholders of record on February 1, 2021.2024.
Dividends
We have putbeen designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in place arrangementstransactions in currencies other than the Bermudian dollar, and there are no restrictions on our ability to require that shares held outside the facilitiestransfer funds (other than funds denominated in Bermudian dollars) in and out of DTC cannot be transferred into such facilities (including where shares are re-deposited into DTC by an existing shareholder) until the transferor of the shares has first delivered the shares to a depository we specify, so that stamp duty and/Bermuda or SDRT may be collected in connection with the initial delivery to the depository. Before such transfer can be registered in our books, the transferor will be required to put in the depository funds to settle the resultant liability for stamp duty and/or SDRT, which will be 1.5% of the value of the shares, and to pay the transfer agent such processing fees as may be established from timedividends to time.United States residents who are holders of our Common Shares.
Equity Compensation Plans
For information on shares issued or to be issued in connection with our equity compensation plans, see "Part III, Item 12.12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters."
Issuer Repurchases of Equity Securities
In 2022, our board of directors authorized a share repurchase program under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, they authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and is subject to compliance with applicable covenants and restrictions under our financing agreements.
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The following table provides a summary of our repurchases of our equity securities during the quarter ended December 31, 2020.2023 (in millions, except average price per share):
| Issuer Repurchases of Equity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Period | Period | Total Number of Securities Repurchased(1) | Average Price Paid per Security | Total Number of Securities Repurchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Securities that May Yet Be Repurchased Under Plans or Programs | Period | Total Number of Securities Purchased | Average Price Paid per Security | Total Number of Securities Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Securities that May Yet Be Purchased Under Plans or Programs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | October 1 - October 31 | 17,313 | $ | 0.11 | — | $ | 500,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| November 1 - November 30 | November 1 - November 30 | 14,685 | $ | 0.08 | — | $ | 500,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 1 - December 31 | December 1 - December 31 | 5,549 | $ | 0.06 | — | $ | 500,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | 37,547 | $ | 0.09 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Total Shareholder Return
The chart below presents a comparison of the cumulative total shareholder return, assuming $100 invested on May 3, 2021 (first trading date after our emergence from the Chapter 11 Cases) for Valaris Limited, the Standard & Poor's MidCap 400 Index and Dow Jones US Select Oil Equipment & Services Index (the "Industry Index").
COMPARISON OF CUMULATIVE TOTAL RETURN(1)During
Among Valaris Limited, the quarter ended December 31, 2020, equity securities were repurchased from employeesS&P MidCap 400 Index and non-employee directors by an affiliated employee benefit trust in connection with the settlement of income tax withholding obligations arising from the vesting of share awards. Such securities remain available for re-issuance in connection with employee share awards.Industry Index
| May 3, 2021 | Fiscal Year Ended December 31, | ||||||||||||||||||||||
| Relisting | 2021 | 2022 | 2023 | ||||||||||||||||||||
| Valaris Limited | 100.0 | 151.9 | 285.3 | 289.3 | |||||||||||||||||||
| S&P MidCap 400 | 100.0 | 104.6 | 91.0 | 105.9 | |||||||||||||||||||
| Industry Index | 100.0 | 96.5 | 160.7 | 168.4 | |||||||||||||||||||
(1) Total return assuming reinvestment of dividends. Assumes $100 invested on May 3, 2021, which represents the bankruptcy court. We do not currently expect to make repurchases underfirst trading date after our emergence from the program while Valaris plc remains subject to chapterChapter 11 bankruptcy proceedings..Cases.
Item 6. Selected Financial DataReserved
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with "Item 1A. Risk Factors" and our consolidated financial statements and the notes thereto in "Item 8. Financial Statements and Supplementary Data" of this report.
The discussion of our results of operations and liquidity in this section includes comparisons for the years ended December 31, 2023 and 2022 (Successor). For a similar discussion, including comparisons for the year ended December 31, 2022, eight months ended December 31, 2021 (Successor), and the four months ended April 30, 2021 (Predecessor), see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report onForm 10-K for the year ended December 31, 2022, filed with the SEC on February 21, 2023.
INTRODUCTION
Our Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry. We currently own an offshore drilling rig fleet of 61 rigs,industry with drilling operations in almost every major offshore market across fivesix continents. Our rig fleet includes 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 45 jackup rigs and a 50% equity interest in ARO, our 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. We operateown the world's largest offshore drilling rig fleet, amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning nine countries on five continents.global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Chapter 11 Proceedings, Emergence from Chapter 11 and Fresh Start Accounting
On the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
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On April 30, 2021 (the "Effective Date"), we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520.0 million capital injection by issuing the First Lien Notes. See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and the Common Shares were issued. Also, former holders of Legacy Valaris' equity were issued Warrants to purchase Common Shares. See “Note 9 - Shareholders' Equity" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the issuance of the Common Shares and Warrants.
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including the Effective Date.
Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date.
See“Note 2 – Chapter 11 Proceedings” and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional details regarding the bankruptcy, our emergence and fresh start accounting.
Our Industry
Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig may cause the balance of supply and demand to vary somewhat between regions, significant variations betweenmostregions are generally of a short-term nature due to rig mobility.
Rig attrition in the industry over the near-term with the expectationlast decade, particularly for floaters, has resulted in a smaller global fleet of rigs that long-term oil prices would remain at levels sufficientis available to support a continued gradual recovery in themeet customer demands. In addition, demand for offshore drilling services. We were focused on opportunitiesservices continues to putimprove as evidenced by increasing global utilization and day rates for offshore drilling rigs. Consequently, our rigs to work, manage liquidity, extend our financial runway, and reduce debt as we sought to navigateoutlook for the extended market downturn and improve our balance sheet. Recognizing our ability to maintain a sufficient level of liquidity to meet our financial obligations depended upon our future performance, whichoffshore drilling business is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, we had significant financial flexibility within our capital structure to support our liability management efforts. However, starting in early 2020, the COVID-19 pandemic and the response thereto negatively impacted the macro-economic environment and global economy. Global oil demand fell sharply at the same time global oil supply increased as a result of certain oil producers competing for market share, leading to a supply glut. As a consequence, the price of Brent crude oil fellpositive.
or execute capital projects. We expect that these challengesour costs will continue for drilling contractors as customers wait to gain additional clarity on commodity pricing and seek to reduce costsrise in the near-term by attempting to renegotiate existing contract terms. We believe the current marketnear term and macro-economic conditions will create a challenging contracting environment through 2021 and into 2022 and potentially beyond.
Backlog
The ARO backlog presented below is 100% of ARO's backlog and is inclusive of backlog on both ARO owned rigs and rigs leased from us. As an unconsolidated 50/50 joint venture, when ARO realizes revenue from its backlog, 50% of the earnings thereon would be reflected in our results in equity in earnings of ARO in our Consolidated Statement of Operations. The earnings from ARO backlog with respect to rigs leased from us will be net of, among other things, payments to us under bareboat charters for those rigs. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
| February 15, 2024 | February 21, 2023 | ||||||||||
Floaters (1) | $ | 2,531.7 | $ | 1,376.9 | |||||||
Jackups (2) | 1,167.4 | 742.3 | |||||||||
Other (3) | 222.3 | 344.0 | |||||||||
| Total | $ | 3,921.4 | $ | 2,463.2 | |||||||
ARO (4) | $ | 2,138.1 | $ | 1,731.8 | |||||||
(1)The increase in Floaters is primarily due to long-term contracts for VALARIS DS-4 and VALARIS DS-8 offshore Brazil, VALARIS DS-7 offshore West Africa, VALARIS DS-16 in the U.S. Gulf of Mexico and a 250-day contract extension for VALARIS DS-15 offshore Brazil, which resulted in incremental aggregate backlog of approximately $1.7 billion. These increases were partially offset by revenues realized.
(2)The increase in Jackups is primarily due to contract awards and extensions for VALARIS 120, VALARIS 72, VALARIS 92, VALARIS 121, VALARIS 107, VALARIS 118, VALARIS 249 and VALARIS Stavanger which resulted in incremental aggregate backlog of approximately $620.0 million. These increases were partially offset by revenues realized.
(3)Other includes the bareboat charter backlog for the jackup rigs leased to ARO to fulfill contracts between ARO and Saudi Aramco in addition to backlog for our managed rig services. Substantially all the operating costs for jackups leased to ARO through the bareboat charter agreements will be borne by ARO.
(4)The increase in ARO backlog is primarily due to an eight-year contract for each of the two newbuild rigs, the first of which was delivered in October 2023 and the second is expected to be delivered in the first half of 2024. These two contracts resulted in incremental aggregate backlog of approximately $924.0 million, which was partially offset by revenues realized.
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The following table summarizes our and 100% of ARO's contract backlog of business as of February 15, 2024 and the periods in which revenues are expected to be realized (in millions):
| 2024 | 2025 | 2026 and beyond | Total | ||||||||||||||||||||||||||
| Floaters | $ | 1,072.7 | $ | 830.8 | $ | 628.2 | $ | 2,531.7 | |||||||||||||||||||||
| Jackups | 548.2 | 352.6 | 266.6 | 1,167.4 | |||||||||||||||||||||||||
| Other | 100.1 | 55.8 | 66.4 | 222.3 | |||||||||||||||||||||||||
| Total | $ | 1,721.0 | $ | 1,239.2 | $ | 961.2 | $ | 3,921.4 | |||||||||||||||||||||
| ARO | $ | 603.3 | $ | 536.9 | $ | 997.9 | $ | 2,138.1 | |||||||||||||||||||||
The amount of actual revenues earned and the actual periods during which revenues are earned will be different from amounts disclosed in our backlog calculations due to a lack of predictability of various factors, including unscheduled repairs, maintenance requirements, weather delays, contract terminations or renegotiations and other factors.
Our drilling contracts generally contain provisions permitting early termination of the contract if the rig is lost or destroyed or by the customer if operations are suspended for a specified period of time due to breakdown of major rig equipment, unsatisfactory performance, "force majeure" events beyond the control of either party or other specified conditions. In addition, our drilling contracts generally permit early termination of the contract by the customer for convenience (without cause), exercisable upon advance notice to us, and in certain cases without making an early termination payment to us. There can be no assurances that our customers will be able to or willing to fulfill their contractual commitments to us.
BUSINESS ENVIRONMENT
Floaters
In recent years, the more constructive oil price environment has led to an improvement in contracting and tendering activity for floaters. The number of contracted benign environment floaters has increased to 123 at December 31, 2023 from a low of 101 in early 2021, contributing to a 12% increase in global utilization, from 73% to 85%, for the industry's active fleet over the same period. This increase in activity is particularly evident for 6th and 7th generation drillships, such as those included in our floater contracting environment remains challenging due to limited demandfleet. Utilization for the global active 6th and excess supply. Floater demand7th generation drillship fleet is currently at 92% and has, declined significantly following the decline in commodity prices in 2014 which caused our customers to reduce capital expenditures, particularlyon average, exceeded 90% for capital-intensive, long-lead deepwater projects,more than twelve months, resulting in a meaningful improvement in day rates for this class of assets.
In 2022, we completed the cancellationreactivation of three stacked drillships and delayone stacked semisubmersible which have commenced long-term contracts. In 2023, we completed the reactivation of drilling programs. Floater demand declined materially in Marchanother two previously stacked drillships, VALARIS DS-8 and April 2020, as our customers reduced capital expenditures particularlyVALARIS DS-17, for capital-intensive, long-lead deepwater projectscontracts which commenced in the wakesecond half of oil price declines2023 for work offshore Brazil, and we are currently reactivating another stacked drillship VALARIS DS-7, for a long-term contract offshore West Africa expected to commence in mid-2024.
From a supply perspective, as of December 31, 2023, the number of benign environment floaters including stacked rigs declined by 42% to 164 from around $60 per barrela peak of 281 in late 2014. Across the stacked drillship fleet and newbuild drillships remaining at year-end 2019 to around $20 per barrel in mid-April 2020. The decline in demand has resulted inSouth Korean shipyards, we believe there are only ten uncontracted drillships remaining that are likely reactivation candidates over the cancellation and delay of drilling programsnext few years, including VALARIS DS-11 and the terminationNewbuild Drillships. We anticipate that continued floater demand growth will further reduce available drillship capacity. Also, given the expected high construction cost and lack of drilling contracts.shipyard capacity, we do not believe that market conditions are supportive of newbuild construction for the foreseeable future.
RESULTS OF OPERATIONS
The following table summarizes our consolidated resultsConsolidated Results of operationsOperations for each of the years in the three-year periodyear ended December 31, 20202023 and 2022 (in millions)millions, except percentages):
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenues | $ | 1,427.2 | $ | 2,053.2 | $ | 1,705.4 | ||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,458.6 | 1,806.0 | 1,319.4 | |||||||||||||||||
| Loss on impairment | 3,646.2 | 104.0 | 40.3 | |||||||||||||||||
| Depreciation | 540.8 | 609.7 | 478.9 | |||||||||||||||||
| General and administrative | 214.6 | 188.9 | 102.7 | |||||||||||||||||
| Total operating expenses | 5,860.2 | 2,708.6 | 1,941.3 | |||||||||||||||||
| Other operating income | 118.1 | — | — | |||||||||||||||||
| Equity in losses of ARO | (7.8) | (12.6) | — | |||||||||||||||||
| Operating loss | (4,322.7) | (668.0) | (235.9) | |||||||||||||||||
| Other income (expense), net | (794.3) | 604.2 | (303.0) | |||||||||||||||||
| Provision (benefit) for income taxes | (259.4) | 128.4 | 89.6 | |||||||||||||||||
| Loss from continuing operations | (4,857.6) | (192.2) | (628.5) | |||||||||||||||||
| Loss from discontinued operations, net | — | — | (8.1) | |||||||||||||||||
| Net loss | (4,857.6) | (192.2) | (636.6) | |||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | 2.1 | (5.8) | (3.1) | |||||||||||||||||
| Net loss attributable to Valaris | $ | (4,855.5) | $ | (198.0) | $ | (639.7) | ||||||||||||||
| Year Ended December 31, | Change | % Change | |||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Revenues | $ | 1,784.2 | $ | 1,602.5 | $ | 181.7 | 11 | % | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 160.4 | 12 | % | ||||||||||||||||||
| Loss on impairment | — | 34.5 | (34.5) | (100) | % | ||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 9.9 | 11 | % | ||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 18.4 | 23 | % | ||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 154.2 | 10 | % | ||||||||||||||||||
| Equity in earnings of ARO | 13.3 | 24.5 | (11.2) | (46) | % | ||||||||||||||||||
| Operating income | 53.5 | 37.2 | 16.3 | 44 | % | ||||||||||||||||||
| Other income, net | 30.7 | 187.7 | (157.0) | (84) | % | ||||||||||||||||||
| Provision (benefit) for income taxes | (782.6) | 43.1 | (825.7) | nm | |||||||||||||||||||
| Net income | 866.8 | 181.8 | 685.0 | 377 | % | ||||||||||||||||||
| Net income attributable to noncontrolling interests | (1.4) | (5.3) | 3.9 | (74) | % | ||||||||||||||||||
| Net income attributable to Valaris | $ | 865.4 | $ | 176.5 | $ | 688.9 | 390 | % | |||||||||||||||
Overview
Revenues declined by $626.0 million, or 30%, asincreased in 2023, compared to the prior year. This decline is2022, primarily due to an increase in average daily revenue earned of $177.6 million primarily attributable to certain rigs that commenced new contracts during 2023 at a $287.4higher average daily revenue, $47.7 million declinefrom an increase in revenue resultingoperating days primarily attributable to floaters that have commenced contracts following reactivation and $12.5 million of higher revenues earned from lease agreements with ARO primarily from higher lease rates for certain rigs. These increases were partially offset by a $51.0 million fee recognized for the sale of VALARIS 5004, VALARIS 5006, VALARIS 6002, VALARIS JU-68, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88, and VALARIS JU-96, which operated in the prior year comparative period, a $286.7 million decline in revenue as a result of fewer days under contract across our fleet, a $150.0 million decline in revenue due to theearly termination of the VALARIS DS-8DS-11 contract and a $28.3 million and $16.0 million, decline in revenues earned under the Secondment Agreement and Transition Services Agreement with ARO, respectively. Further, the additional revenues earned under Lease Agreements with ARO due to the inclusion of a full year of results in 2020 as compared to the period from April 11, 2019 to December 31, 2019 from the comparable period was offset by a reduction of our rental revenues to reflect an amendment to the Shareholder Agreement that impacted the bareboat charter rate in the lease agreements. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. The decline in revenue was partially offset by $113.6 million of revenue earned by rigs added from the Rowan Transaction, and $46.3 million of contract termination fees received for certain rigs.2022.
During the first and second quarters of 2020,2022, we recorded non-cash losses on impairment totaling $3.6 billion,$34.5 million with respect to assets in our fleet, primarily duecustomer-specific capital upgrades for VALARIS DS-11 made pursuant to the adverse change interms of the current and anticipated market for these assets.drilling contract that was terminated during the second quarter of 2022. See "Note 7 - Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Depreciation expense declined by $68.9 million, or 11%, asincreased in 2023, compared to the prior year period2022, primarily due to lower depreciation expense onnew assets placed in service for certain assets which were impaired during the firstrigs that underwent reactivation projects and second quarters of 2020, some of which were subsequently sold in the third and fourth quarters of 2020. This decrease was partially offset by depreciation expense recorded for rigs added in the Rowan Transaction as well as for the VALARIS JU-123 which commenced operations in August 2019.capital upgrades.
General and administrative expenses increased by $25.7 million, or 14%, as compared to the prior year period primarily due to the backstop commitment feehigher compensation related to our long-term incentive plans and legal and otherhigher professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date. This increase was partially offset by merger related costs incurred in the prior year comparative period.fees.
Other operating income, of $118.1 million recognized during 2020 was due to loss of hire insurance recoveries collected for the VALARIS DS-8 non-drilling incident.
Rig Counts, Utilization and Average Day RatesDaily Revenue
The following table summarizes our offshore drilling rigs by reportable segment, rigs under construction, rigs held-for-sale and ARO's offshore drilling rigs as of December 31, 2020, 20192023 and 2018. Legacy Rowan and ARO rigs are included from the date the Rowan Transaction closed in April 2019:2022:
| 2020 | 2019 | 2018 | ||||||||||||||||||
Floaters(1) | 16 | 24 | 22 | |||||||||||||||||
Jackups(2) | 36 | 41 | 34 | |||||||||||||||||
Other(3) | 9 | 9 | — | |||||||||||||||||
Held-for-sale(4) | — | 3 | — | |||||||||||||||||
| Total Valaris | 61 | 77 | 56 | |||||||||||||||||
Valaris - Under construction(5) | 2 | 2 | 3 | |||||||||||||||||
ARO(6) | 7 | 7 | — | |||||||||||||||||
ARO - Under construction (7) | 2 | — | — | |||||||||||||||||
| 2023 | 2022 | ||||||||||
Floaters (1) | 18 | 16 | |||||||||
Jackups(2) | 27 | 28 | |||||||||
Other(3) | 8 | 8 | |||||||||
| Total Valaris | 53 | 52 | |||||||||
ARO(4) | 8 | 7 | |||||||||
(1)During 2020,the fourth quarter of 2023, we sold VALARIS 5004, VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS 8504, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6.
(2)During 2020,the second quarter of 2023, we sold VALARIS JU-71, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88 and VALARIS JU-105.54.
(3)During 2019, we added nine jackups fromThis represents the Rowan Transaction that arejackup rigs leased to ARO through bareboat charter agreements whereby substantially all operating costs are incurred by ARO. Rigs leased to ARO operate under contracts with Saudi Aramco.
(4)During 2019, we classified VALARIS JU-68, VALARIS JU-70 and VALARIS 6002 as held-for-sale, allThis represents the eight jackup rigs owned by ARO which are operating under long-term contracts with Saudi Aramco, including Kingdom 1, a jackup rig which was delivered in the fourth quarter of which were subsequently sold in 2020.2023.
The following table summarizes our and ARO's rig utilization and average day rates from continuing operationsdaily revenue by reportable segment for each of the years in the three-year period ended December 31, 2020. Rig utilization and average day rates include results of rigs added in the Rowan Transaction or ARO from the date the Rowan Transaction closed in April 2019:segment:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||
Rig Utilization(1) | |||||||||||||||||||||||||||||||||||||||||||
Rig Utilization - Total Fleet (1) | Rig Utilization - Total Fleet (1) | ||||||||||||||||||||||||||||||||||||||||||
| Floaters | Floaters | 29% | 47% | 46% | Floaters | 58% | 45% | ||||||||||||||||||||||||||||||||||||
| Jackups | Jackups | 54% | 66% | 63% | Jackups | 59% | 66% | ||||||||||||||||||||||||||||||||||||
Other(2) | Other(2) | 98% | 100% | 100% | Other(2) | 100% | 100% | ||||||||||||||||||||||||||||||||||||
| Total Valaris | Total Valaris | 54% | 63% | 56% | Total Valaris | 66% | 66% | ||||||||||||||||||||||||||||||||||||
| ARO | ARO | 94% | 93% | —% | ARO | 93% | 92% | ||||||||||||||||||||||||||||||||||||
Average Day Rates(3) | |||||||||||||||||||||||||||||||||||||||||||
Rig Utilization - Active Fleet (1) | |||||||||||||||||||||||||||||||||||||||||||
Rig Utilization - Active Fleet (1) | |||||||||||||||||||||||||||||||||||||||||||
Rig Utilization - Active Fleet (1) | |||||||||||||||||||||||||||||||||||||||||||
| Floaters | |||||||||||||||||||||||||||||||||||||||||||
| Floaters | |||||||||||||||||||||||||||||||||||||||||||
| Floaters | Floaters | $ | 178,372 | $ | 218,837 | $ | 248,395 | 75% | 67% | ||||||||||||||||||||||||||||||||||
| Jackups | Jackups | 83,618 | 78,133 | 77,086 | Jackups | 79% | 86% | ||||||||||||||||||||||||||||||||||||
Other(2) | Other(2) | 31,207 | 49,236 | 81,751 | Other(2) | 100% | 100% | ||||||||||||||||||||||||||||||||||||
| Total Valaris | Total Valaris | $ | 83,845 | $ | 108,313 | $ | 128,365 | Total Valaris | 83% | 85% | |||||||||||||||||||||||||||||||||
| ARO | ARO | $ | 100,921 | $ | 71,170 | $ | — | ARO | 93% | 92% | |||||||||||||||||||||||||||||||||
Average Daily Revenue (3) | |||||||||||||||||||||||||||||||||||||||||||
Average Daily Revenue (3) | |||||||||||||||||||||||||||||||||||||||||||
Average Daily Revenue (3) | |||||||||||||||||||||||||||||||||||||||||||
| Floaters | |||||||||||||||||||||||||||||||||||||||||||
| Jackups | |||||||||||||||||||||||||||||||||||||||||||
Other(2) | |||||||||||||||||||||||||||||||||||||||||||
| Total Valaris | |||||||||||||||||||||||||||||||||||||||||||
| ARO | |||||||||||||||||||||||||||||||||||||||||||
(1)Rig utilization isfor the total fleet and active fleet are derived by dividing the number ofoperating days under contract by the number of days in the period. Days under contractperiod for the total fleet and active fleet, respectively. Active fleet represents rigs that are not preservation stacked and includes rigs that are in the process of being reactivated. Operating days equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with early contract terminations, compensated downtime and mobilizations.mobilizations and excluding suspension periods. When revenue is deferred and amortized over a future period, for example, when we receive fees while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract.operating days.
(2)Includes our two management services contracts and our nine rigs leased to ARO under bareboat charter contracts.
(3)Average day rates aredaily revenue is derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump-sum revenues earned during suspension periods and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days,operating days. Beginning in 2023, we began presenting average daily revenue instead of the previously reported average day rate metric, which further excluded lump-sum revenues and amortization thereof. Average daily revenue is a more comprehensive measurement of our revenue-earning performance and more closely aligns with the calculation methodology used by our closest offshore drilling peers. The prior period has been adjusted to exclude contract days associatedconform with certain mobilizations, demobilizations and shipyard contracts.the current period presentation.
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Operating Income by Segment
Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-partiesthird parties and the activities associated with our arrangements with ARO under the Rig Lease Agreements, the Secondment Agreement and the Transition Services Agreement.bareboat charter arrangements (the "Lease Agreements"). Floaters, Jackups and ARO are also reportable segments.
Segment information for the year ended December 31, 2023 and 2022 is as follows (in millions).
Year Ended December 31, 2023
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 948.7 | $ | 659.6 | $ | 496.6 | $ | 175.9 | $ | (496.6) | $ | 1,784.2 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 812.0 | 517.4 | 365.9 | 75.2 | (226.9) | 1,543.6 | |||||||||||||||||||||||||||||
| Depreciation | 55.8 | 40.0 | 65.9 | 5.0 | (65.6) | 101.1 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 22.2 | — | 77.1 | 99.3 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 13.3 | 13.3 | |||||||||||||||||||||||||||||
| Operating income | $ | 80.9 | $ | 102.2 | $ | 42.6 | $ | 95.7 | $ | (267.9) | $ | 53.5 | |||||||||||||||||||||||
Year Ended December 31, 2022
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 700.5 | $ | 744.2 | $ | 459.5 | $ | 157.8 | $ | (459.5) | $ | 1,602.5 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 646.0 | 538.9 | 341.8 | 76.4 | (219.9) | 1,383.2 | |||||||||||||||||||||||||||||
| Loss on impairment | 34.5 | — | — | — | — | 34.5 | |||||||||||||||||||||||||||||
| Depreciation | 50.0 | 36.1 | 63.4 | 4.6 | (62.9) | 91.2 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 18.7 | — | 62.2 | 80.9 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 24.5 | 24.5 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (30.0) | $ | 169.2 | $ | 35.6 | $ | 76.8 | $ | (214.4) | $ | 37.2 | |||||||||||||||||||||||
55
Floaters
Floater revenue increased $248.2 million, or 35%, in 2023 as compared to 2022, primarily due to $210.3 million from increased operating days primarily attributable to rigs that have commenced contracts following reactivation or returned to work upon completion of special periodic surveys and $96.7 million from higher average daily revenue earned primarily due to VALARIS DS-12 and VALARIS DPS-5 working under higher day rate contracts in 2023 as compared to the prior year. These increases were partially offset by $51.0 million of revenue recognized in 2022 attributable to a termination fee for the VALARIS DS-11 contract.
Floater contract drilling expense increased $166.0 million, or 26%, in 2023 as compared to 2022, primarily due to $167.8 million attributable to rigs that have returned to work upon completion of reactivation projects and an $36.2 million increase in reactivation costs. These increases were partially offset by a $28.4 million decrease in costs for certain claims.
During 2022, we recorded non-cash losses on impairment totaling $34.5 million, with respect to customer-specific capital upgrades for VALARIS DS-11 made pursuant to the terms of the drilling contract that was terminated during the second quarter of 2022. See "Note 7 -Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Floater depreciation expense increased $5.8 million, or 12%, in 2023 as compared to 2022, primarily due to new assets placed in service for certain rigs that underwent reactivation projects and capital upgrades.
Jackups
Jackup revenues declined $84.6 million, or 11%, in 2023 as compared to 2022, primarily due to $162.6 million from decreased operating days primarily due to rigs that completed contracts in the North Sea during the first half of 2023 due to lower activity in the region, certain rigs that were mobilizing or idle between contracts during 2023, and the sale of VALARIS 54 which operated in 2022. These decreases were partially offset by a $75.2 million increase due to higher average daily revenue earned.
Jackup contract drilling expense declined $21.5 million, or 4%, in 2023 as compared to 2022, primarily due to $49.2 million of lower costs for rigs that were idle or between contracts in 2023, and a $16.1 million decrease in operating costs for VALARIS 140 and VALARIS 141, which we started leasing to ARO in 2022. These decreases were partially offset by a $42.1 million increase in repair costs in 2023 primarily associated with maintenance performed during special periodic surveys.
Jackup depreciation expense increased $3.9 million, or 11%, in 2023 as compared to 2022, due to new assets placed in service for certain rigs that underwent capital upgrades, partially offset by VALARIS 54, which was sold in the second quarter of 2023.
ARO
The operating revenues of ARO reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs and the rigs leased from us. Contract drilling expenses are inclusive of the bareboat charter fees for the rigs leased from us. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on ARO and related arrangements.
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 505.8 | $ | 765.3 | $ | 549.4 | $ | 156.1 | $ | (549.4) | $ | 1,427.2 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 633.9 | 733.3 | 388.2 | 91.4 | (388.2) | 1,458.6 | |||||||||||||||||||||||||||||
| Loss on impairment | 3,386.2 | 254.3 | — | 5.7 | — | 3,646.2 | |||||||||||||||||||||||||||||
| Depreciation | 262.8 | 217.2 | 54.8 | 44.8 | (38.8) | 540.8 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 24.2 | — | 190.4 | 214.6 | |||||||||||||||||||||||||||||
| Other operating income | 118.1 | — | — | — | — | 118.1 | |||||||||||||||||||||||||||||
| Equity in losses of ARO | — | — | — | (7.8) | (7.8) | ||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (3,659.0) | $ | (439.5) | $ | 82.2 | $ | 14.2 | $ | (320.6) | $ | (4,322.7) | |||||||||||||||||||||||
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 1,014.4 | $ | 834.6 | $ | 410.5 | $ | 204.2 | $ | (410.5) | $ | 2,053.2 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 898.6 | 788.9 | 280.2 | 118.5 | (280.2) | 1,806.0 | |||||||||||||||||||||||||||||
| Loss on impairment | 88.2 | 10.2 | — | — | 5.6 | 104.0 | |||||||||||||||||||||||||||||
| Depreciation | 362.3 | 203.3 | 40.3 | 25.5 | (21.7) | 609.7 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 27.1 | — | 161.8 | 188.9 | |||||||||||||||||||||||||||||
| Equity in losses of ARO | — | — | — | — | (12.6) | (12.6) | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (334.7) | $ | (167.8) | $ | 62.9 | $ | 60.2 | $ | (288.6) | $ | (668.0) | |||||||||||||||||||||||
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 1,013.5 | $ | 630.9 | $ | — | $ | 61.0 | $ | — | $ | 1,705.4 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 737.4 | 526.5 | — | 55.5 | — | 1,319.4 | |||||||||||||||||||||||||||||
| Loss on impairment | — | 40.3 | — | — | — | 40.3 | |||||||||||||||||||||||||||||
| Depreciation | 311.8 | 153.3 | — | — | 13.8 | 478.9 | |||||||||||||||||||||||||||||
| General and administrative | — | — | — | — | 102.7 | 102.7 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (35.7) | $ | (89.2) | $ | — | $ | 5.5 | $ | (116.5) | $ | (235.9) | |||||||||||||||||||||||
Contract drilling expense increased by $161.2$24.1 million, or 22%7%, in 2023 as compared to the prior year2022, primarily due to $142.4$13.8 million of contract drilling expense incurred by the Rowan rigsincremental operating costs related to VALARIS 140, VALARIS 141 and $38.2Kingdom 1, $8.7 million due to the commencement of VALARIS DS-9 drilling operations. Thefrom higher personnel cost and a $4.8 million increase wasin repair and maintenance costs. These increases were partially offset by the sale of$7.5 million decrease from VALARIS 5006 and ENSCO 6001 and lower costs on idle rigs.
Other
Other revenues declined $48.1increased $18.1 million, or 24%11%, for the year ended December 31, 2020,in 2023 as compared to the prior year period,2022, primarily due to due to lower revenues earned under the Secondment Agreement and Transition Services Agreement with ARO$12.5 million of $28.3 million and $16.0 million, respectively. Further, the additional revenues earned under Lease Agreements due to the inclusion of a full year of results in 2020 as compared to the period from April 11, 2019 to December 31, 2019 from the comparable period was offset by a reduction of our rental revenues to reflect an amendment to the Shareholder Agreement that impacted the bareboat charter rate in the lease agreements. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
Other Income (Expense), Net
The following table summarizes other income (expense), net, for each of the years in the three-year period ended December 31, 2020 (in millions):
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest income | $ | 19.7 | $ | 28.1 | $ | 14.5 | |||||||||||
| Interest expense, net: | |||||||||||||||||
| Interest expense | (291.9) | (449.2) | (345.3) | ||||||||||||||
| Capitalized interest | 1.3 | 20.9 | 62.6 | ||||||||||||||
| (290.6) | (428.3) | (282.7) | |||||||||||||||
| Reorganization items, net | (527.6) | — | — | ||||||||||||||
| Other, net | 4.2 | 1,004.4 | (34.8) | ||||||||||||||
| $ | (794.3) | $ | 604.2 | $ | (303.0) | ||||||||||||
| Year Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Interest income | $ | 101.4 | $ | 65.5 | |||||||
| Interest expense, net | (68.9) | (45.3) | |||||||||
| Loss on debt extinguishment | (29.2) | — | |||||||||
| Net gain on sale of property | 28.6 | 141.2 | |||||||||
| Net foreign currency exchange gains (losses) | (3.5) | 12.2 | |||||||||
| Net periodic pension and retiree medical income | 0.9 | 16.4 | |||||||||
| Other, net | 1.4 | (2.3) | |||||||||
| $ | 30.7 | $ | 187.7 | ||||||||
Interest income decreased during 2020increased by $35.9 million, or 55%, in 2023 as compared to the respective prior-year period2022, primarily due to fewer investmentsan increase of $33.3 million of interest income on cash equivalents due to a higher average balance during 2023 and a $19.2 million increase on interest income earned on our Notes Receivable from ARO attributable to higher interest rates in the current year as compared to2023, partially offset by non-cash interest income of $14.8 million recognized in the prior year comparable period. Interest income increased during 2019 as compared to the respective prior-year period primarily due to interest income of $16.8 million earned on the shareholder notepartial principal repayment of our Notes Receivable from ARO (see "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on ARO) acquired in the Rowan Transaction.September 2022.
Interest expense, decreased during 2020net increased by $157.3$23.6 million, or 35%52%, in 2023 as compared to 2022, primarily due to a higher principal debt balance in 2023.
We recognized a $29.2 million loss from the prior yearextinguishment of the First Lien Notes in 2023.
Net gains on the sale of property decreased by $112.6 million in 2023 as we did not accrue interest on our outstanding debt or amortize discounts, premiums and debt issuance costs subsequentcompared to the chapter 11 filing totaling2022, primarily due $140.7 million of gains recognized in 2022 on the sales of VALARIS 113, VALARIS 114, VALARIS 36 and $29.8 million, respectively. Further, debt repurchases resultedVALARIS 67 and additional proceeds received for two rigs sold in interest savingsprior years as a result of $19.2 million. These declines werepost-sale conditions of those sale agreements. This decrease was partially offset by increased interest on debt acquired from Rowan totaling $35.7 million. Interest expense increased during 2019 by $103.9 million, or 30%, as compared to the prior year due to interest expense incurred on senior notes acquired in the Rowan Transaction.
Our functional currency is the U.S. dollar, and we predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. However, we have net assets and liabilities denominated in numerous foreign currencies and a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates.
Net foreign currency exchange losses inclusive of offsetting fair value derivatives, were $11.0$3.5 million $7.4for 2023 primarily included losses of $3.0 million, $2.4 million and $17.2$1.6 million related to euros, Brazilian reals and were included in other, net, in our consolidated statementsAngolan kwanza, respectively, partially offset by a gain of operations for the years ended December 31, 2020, 2019 and 2018, respectively.$3.9 million from Nigerian naira. Net foreign currency exchange losses incurred during 2020gains of $12.2 million for 2022 primarily included $7.3$7.2 million, $1.9 million and $1.4$1.7 million related to euros, Egyptian pounds and Angolan kwanza, respectively. Net foreign currency exchange losses incurred during 2019 included $3.3 million and $2.8 million, related to euros and Angolan kwanza, respectively. During 2018, the net foreign currency exchange losses incurred included $5.8 million, $3.6 million and $2.0 million, related to Angolan kwanza, euros and Brazilian reals,Norwegian kroner, respectively.
Net unrealized gains of $3.2periodic pension and retiree medical income decreased by $15.5 million in 2023 as compared to 2022, primarily due to higher interest cost and $5.0 million and unrealized losses of $0.7 million from marketable securities heldlower expected return on plan assets attributed to an increase in our supplemental executive retirement plans ("the SERP") were included in other, net, in our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively. Information on the fair value measurement of our marketable securities held in the SERP is presented in "Note 6 - Fair Value Measurements" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data."discount rate.
Provision for Income Taxes
Valaris plc, our parent company,Limited is domiciled and resident in the U.K.Bermuda. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-Bermuda subsidiaries is not subject to Bermuda taxation. Legacy Valaris was domiciled and resident in the U.K. The income of our non-U.K. subsidiaries iswas generally not subject to U.K. taxation.
Income tax rates imposedand taxation systems in the tax jurisdictions in which our subsidiaries conduct operations vary as does the tax baseand our subsidiaries are frequently subjected to which the rates are applied.minimum taxation regimes. In some cases,jurisdictions, tax rates may be applicable toliabilities are based on gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws,factors, rather than on net income, and our subsidiaries are frequently unable to net income.realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss.
Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Further, we may continue to incur income tax expense in periods in which we operate at a loss.
Effective Tax Rate
During the yearyears ended December 31, 2020,2023 and 2022, we recorded an income tax benefit of $259.4$782.6 million and during the years ended December 31, 2019 and 2018 we recordedan income tax expense of $128.4 million and $89.6$43.1 million, respectively. Our consolidated effective income tax rates during the same periods were 5.1%, (201.3)(929.5)% and (16.6)%19.2%, respectively. The tax benefit in 2023 includes a $799.5 million deferred tax benefit recognized in the fourth quarter of 2023 to reduce our valuation allowance due to the determination that sufficient positive evidence now exists to conclude that a portion of the allowance is no longer needed. During 2023, we also recognized tax benefits for the reduction of unrecognized tax benefit liabilities related to the lapse of statutes of limitations applicable to certain of our tax positions of $73.6 million and settlements reached with taxing authorities of $41.8 million. These benefits were partially offset by a $88.6 million increase in unrecognized tax benefit liabilities for tax positions taken during prior years, including $66.0 million recognized in the fourth quarter of 2023 related to tax assessments received from the Luxembourg tax authorities. See "Note12 - Income Taxes" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
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Our 20202023 consolidated effective income tax rate includes a $322.4 milliondiscrete tax benefit associated with the impact of various discrete tax items, including restructuring transactions, impairments of rigs and other assets, implementation of the U.S. CARES Act,$42.0 million primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years rig sales, reorganization items and the resolution of other prior periodincluding unrecognized tax matters.benefits described above.
Our 20192022 consolidated effective income tax rate included $2.3includes $10.3 million associated with the impact of various discrete tax items, including $28.3a $17.2 million of tax expense associated with final rules relating to U.S. tax reform, gains on repurchase of debt and settlement proceeds, partially offset by $26.0 million ofincome tax benefit related to restructuring transactions,associated with changes in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset primarily by tax expense attributable to income associated with tax positions taken in prior years and other resolutions of prior year tax matters and rig sales.
Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2020, 20192023 and 20182022 were (7.6)%, (14.6)(872.3)% and (24.8)%73.6%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three-year period result primarily from changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and differences in tax rates in such taxing jurisdictions.
Divestitures
Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. Consistent with this strategy, we sold 14five jackup rigs seven dynamically positioned semisubmersible rigs, three moored semisubmersible rigs and three drillships during the three-yeartwo-year period ended December 31, 2020.2023.
We continue to focus on our fleet management strategy in light of the composition of our rig fleet. While taking into account certain restrictions on the sales of assets under our DIP Credit Agreement,debt agreements, as part of our strategy, we may act opportunistically from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of older, lower-specification or non-core rigs.
We sold the following rigs during the three-year periodyears ended December 31, 20202023 and 2022 (in millions):
| Rig | Date of Sale | Classification(1) | Segment(1) | Net Proceeds | Net Book Value(2) | Pre-tax Gain/(Loss) | ||||||||||||||||||||||||||||||||
| VALARIS 8504 | October 2020 | Continuing | Floater | $ | 4.7 | $ | 4.0 | $ | .7 | |||||||||||||||||||||||||||||
| VALARIS JU-88 | October 2020 | Continuing | Jackups | 1.4 | .3 | 1.1 | ||||||||||||||||||||||||||||||||
| VALARIS JU-84 | October 2020 | Continuing | Jackups | 1.2 | .3 | .9 | ||||||||||||||||||||||||||||||||
| VALARIS JU-105 | September 2020 | Continuing | Jackups | 2.1 | .8 | 1.3 | ||||||||||||||||||||||||||||||||
| VALARIS DS-6 | August 2020 | Continuing | Floaters | 5.7 | 6.1 | (.4) | ||||||||||||||||||||||||||||||||
| VALARIS JU-87 | August 2020 | Continuing | Jackups | .3 | .2 | .1 | ||||||||||||||||||||||||||||||||
| VALARIS 8500 | July 2020 | Continuing | Floaters | 4.0 | .7 | 3.3 | ||||||||||||||||||||||||||||||||
| VALARIS 8501 | July 2020 | Continuing | Floaters | 4.0 | .7 | 3.3 | ||||||||||||||||||||||||||||||||
| VALARIS 8502 | July 2020 | Continuing | Floaters | 1.8 | .7 | 1.1 | ||||||||||||||||||||||||||||||||
| VALARIS DS-3 | July 2020 | Continuing | Floaters | 6.1 | 6.1 | — | ||||||||||||||||||||||||||||||||
| VALARIS DS-5 | July 2020 | Continuing | Floaters | 6.1 | 6.1 | — | ||||||||||||||||||||||||||||||||
| VALARIS JU-71 | June 2020 | Continuing | Jackups | .2 | .8 | (.6) | ||||||||||||||||||||||||||||||||
| VALARIS JU-70 | June 2020 | Continuing | Jackups | .6 | 1.0 | (.4) | ||||||||||||||||||||||||||||||||
| VALARIS 5004 | April 2020 | Continuing | Floaters | 1.9 | 2.0 | (.1) | ||||||||||||||||||||||||||||||||
| VALARIS JU-68 | January 2020 | Continuing | Jackups | .3 | .3 | — | ||||||||||||||||||||||||||||||||
| VALARIS 6002 | January 2020 | Continuing | Floaters | 2.1 | .9 | 1.2 | ||||||||||||||||||||||||||||||||
| VALARIS JU-96 | December 2019 | Continuing | Jackups | 1.9 | .3 | 1.6 | ||||||||||||||||||||||||||||||||
| VALARIS 5006 | November 2019 | Continuing | Floaters | 7.0 | 6.0 | 1.0 | ||||||||||||||||||||||||||||||||
| VALARIS JU-42 | October 2019 | Continuing | Jackups | 2.9 | 2.5 | .4 | ||||||||||||||||||||||||||||||||
| Gorilla IV | May 2019 | Continuing | Jackups | 2.5 | 2.5 | — | ||||||||||||||||||||||||||||||||
| ENSCO 97 | April 2019 | Continuing | Jackups | 1.7 | 1.0 | .7 | ||||||||||||||||||||||||||||||||
| ENSCO 80 | August 2018 | Continuing | Jackups | 1.0 | .5 | .5 | ||||||||||||||||||||||||||||||||
| ENSCO 5005 | August 2018 | Continuing | Floaters | 4.0 | 2.0 | 2.0 | ||||||||||||||||||||||||||||||||
| ENSCO 6001 | July 2018 | Continuing | Floaters | 2.0 | .9 | 1.1 | ||||||||||||||||||||||||||||||||
| ENSCO 7500 | April 2018 | Discontinued | Floaters | 2.6 | 1.5 | 1.1 | ||||||||||||||||||||||||||||||||
| ENSCO 81 | April 2018 | Continuing | Jackups | 1.0 | .3 | .7 | ||||||||||||||||||||||||||||||||
| ENSCO 82 | April 2018 | Continuing | Jackups | 1.0 | .3 | .7 | ||||||||||||||||||||||||||||||||
| $ | 70.1 | $ | 48.8 | $ | 21.3 | |||||||||||||||||||||||||||||||||
| Rig | Date of Sale | Segment(1) | Net Proceeds | Net Book Value | Pre-tax Gain | |||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| VALARIS 54 | April 2023 | Jackups | $ | 28.2 | $ | 0.9 | $ | 27.3 | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| VALARIS 36 | May 2022 | Jackups | $ | 8.8 | $ | 0.3 | $ | 8.5 | ||||||||||||||||||||||||||||||
| VALARIS 113 | April 2022 | Jackups | 62.0 | 2.0 | 60.0 | |||||||||||||||||||||||||||||||||
| VALARIS 114 | April 2022 | Jackups | 62.0 | 2.0 | 60.0 | |||||||||||||||||||||||||||||||||
| VALARIS 67 | March 2022 | Jackups | 5.0 | 3.0 | 2.0 | |||||||||||||||||||||||||||||||||
| $ | 137.8 | $ | 7.3 | $ | 130.5 | |||||||||||||||||||||||||||||||||
(1)Classification denotes the location of the operating results and gain (loss) on sale for each rig in our consolidated statementsConsolidated Statements of operations. For rigs' operating results that were reclassified to discontinued operations in our consolidated statements of operations, these results were previously included within the specified operating segment.
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LIQUIDITY AND CAPITAL RESOURCES
We expect to fund our short-term liquidity needs, including contractual obligations and Effectanticipated capital expenditures, as well as working capital requirements, from cash and cash equivalents, cash flows from operations and borrowings under the Credit Agreement. We expect to fund our long-term liquidity needs, including contractual obligations and anticipated capital expenditures from cash and cash equivalents, cash flows from operations as well as cash to be received from maturity of Automatic Stayour Notes Receivable from ARO and from the distribution of earnings from ARO. We may rely on the issuance of debt and/or equity securities in the future to supplement our liquidity needs. However, the Indenture, dated as of April 19, 2023 (the "Indenture"), and the Credit Agreement contain covenants that limit our ability to incur additional indebtedness.
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash and cash equivalents | $ | 325.8 | $ | 97.2 | $ | 275.1 | |||||||||||
| Short-term investments | — | — | 329.0 | ||||||||||||||
| Available DIP Facility capacity | 500.0 | — | — | ||||||||||||||
| Available credit facility borrowing capacity | — | 1,622.2 | 2,000.0 | ||||||||||||||
| Total liquidity | $ | 825.8 | $ | 1,719.4 | $ | 2,604.1 | |||||||||||
| Working capital | $ | 746.1 | $ | 233.7 | $ | 781.2 | |||||||||||
Current ratio(1) | 2.7 | 1.3 | 2.5 | ||||||||||||||
Cash Flows and Capital Expenditures
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Net cash used in operating activities of continuing operations | $ | (251.7) | $ | (276.9) | $ | (55.7) | |||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||||||||||||||||
| Capital expenditures | Capital expenditures | $ | 93.8 | $ | 227.0 | $ | 426.7 | ||||||||||||||||||||||||
| Capital expenditures | |||||||||||||||||||||||||||||||
| Capital expenditures | |||||||||||||||||||||||||||||||
During 2020, cash flows used inthe year ended December 31, 2023, we generated $267.5 million from operating activities decreasedrelated primarily to higher margins, the collection of $45.9 million for certain tax receivables and other changes in working capital. Our primary uses of cash were $337.0 million for the purchase of the Newbuild Drillships and $359.1 million for maintenance and upgrades of our drilling rigs, including reactivations. Our other primary sources and uses of cash during 2023 resulted from the First Lien Note redemption, the corresponding Second Lien Notes issuance and our share repurchase program, which are each further discussed below.
During the year ended December 31, 2022, our other primary sources of cash were proceeds of $150.3 million for the disposition of assets and $40.0 million from the partial early repayment of the Notes Receivable from ARO. For the same period, our cash provided by $25.2operating activities of $127.0 million related primarily to improving margins and the collection of $54.8 million for certain tax receivables.
We continue to take a disciplined approach to reactivations with our stacked rigs, including the Newbuild Drillships, only reactivating them for opportunities that provide meaningful returns. Generally, most of the reactivation cost will be operating expenses, recognized in the income statement, related to de-preservation activities, including reinstalling key pieces of equipment and crew costs. Capital expenditures during reactivations include rig modifications, equipment overhauls and any customer required capital upgrades. Reactivation costs incurred for the Newbuild Drillships would be capitalized as comparedsuch activities would be required to prepare the prior year duerigs for their intended use. We would generally expect to lower interest costs, partially offset by declining margins.be compensated for any customer-specific enhancements.
Based on our current projections, we expect capital expenditures during 20212024 to approximate $42.5$390.0 million forto $430.0 million primarily relating to maintenance and upgrade projects, including rig enhancement projectsreactivation and minor upgrades and improvements.associated contract-specific capital expenditures. We expect to receive upfront payments from our customers of approximately $55.0 million relating to these projects. Depending on market conditions, contracting activity and future opportunities, we may reduce our planned expendituresreactivate additional rigs or make additional capital expenditures to upgrade rigs for customer requirements.requirements and acquire additional rigs.
We review from time to time possible acquisition opportunities relating to our business, which may include the acquisition of rigs or other businesses. The timing, size or success of any acquisition efforts and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with cash on hand and proceeds from debt and/or equity issuances and may issue equity directly to the sellers. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend on our future operating performance, restrictions to incur additional debt in the Indenture and the Credit Agreement, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to shareholders.
In connection with our sustainability-related efforts, during 2023, we spent approximately $7.0 million and expect spend during 2024 to be comparable. Our sustainability initiatives will continue to require, among other actions, investment in systems and equipment and coordination with our customers.
Financing and Capital Resources
The indenture governingFirst Lien Notes were redeemed on May 3, 2023 for an aggregate redemption price of approximately $571.8 million (excluding accrued and unpaid interest) with a portion of the 2024 Convertiblenet proceeds from the issuance of the Initial Second Lien Notes, contains customary events of default, including failure to pay principal or interest on such notes when due, among others. The indenture also contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions.as discussed below. See "“Note 8- Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on our 2024 Convertiblethe First Lien Notes.
Second Lien Notes
On April 19, 2023, the Company and Valaris Finance Company LLC (“Valaris Finance,” together, the "Issuers"), issued and sold $700.0 million aggregate principal amount of Second Lien Notes 4.875% 2022 Notes, 4.75% 2024 Notes, 8% 2024 Notes, 2024 Notes, 2025 Notes, 7.375% 2025 Notes, 2026 Notes, 2042 Notes, 5.85% 2044 Notes, Existing 2044 Notes,(the "Initial Second Lien Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Pride Notes, the Debentures and 2024 Convertible Notes" together are the "Senior Notes"Securities Act of 1933, as amended (the “Securities Act”). The commencementInitial Second Lien Notes were issued at par for net proceeds of $681.4 million, after deducting the initial purchasers’ discount and offering expenses. A portion of the Chapter 11 Casesproceeds were used to fund the redemption of all of the outstanding First Lien Notes as discussed above.
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Additionally, on August 21, 2023, the Issuers issued $400.0 million aggregate principal amount of additional Second Lien Notes (the "Additional Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act. The Additional Notes were issued at 100.75% of par, plus accrued interest from April 19, 2020, constituted2023, for net proceeds of approximately $396.9 million after deducting the initial purchasers’ discount and estimated offering expenses, and excluding accrued interest received of $11.4 million. We used a portion of the proceeds to finance the purchase of the Newbuild Drillships as described above.
The Initial Second Lien Notes and the Additional Notes were issued under the Indenture and form a single series. The Second Lien Notes mature on April 30, 2030 and bear an eventinterest rate of default under our Senior Notes.8.375% per annum. Interest is payable semi-annually in arrears on April 30 and October 30 of each year. See "“Note 28 - Chapter 11 Proceedings and Ability to Continue as a Going Concern"Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for moreadditional information related to our Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness.on the Second Lien Notes.
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price(1) | ||||||||||
| Year Ended December 31, 2020 | |||||||||||
| 4.70% Senior notes due 2021 | $ | 12.8 | $ | 9.7 | |||||||
| Year Ended December 31, 2019 | |||||||||||
| 4.50% Senior notes due 2024 | $ | 320.0 | $ | 240.0 | |||||||
| 4.75% Senior notes due 2024 | 79.5 | 61.2 | |||||||||
| 8.00% Senior notes due 2024 | 39.7 | 33.8 | |||||||||
| 5.20% Senior notes due 2025 | 335.5 | 250.0 | |||||||||
| 7.375% Senior notes due 2025 | 139.2 | 109.2 | |||||||||
| 7.20% Senior notes due 2027 | 37.9 | 29.9 | |||||||||
| $ | 951.8 | $ | 724.1 | ||||||||
| Year Ended December 31, 2018 | |||||||||||
| 8.50% Senior notes due 2019 | $ | 237.6 | $ | 256.8 | |||||||
| 6.875% Senior notes due 2020 | 328.0 | 354.7 | |||||||||
| 4.70% Senior notes due 2021 | 156.2 | 159.7 | |||||||||
| $ | 721.8 | $ | 771.2 | ||||||||
Subject to Compromise(2) | |||||||||||||||||||||||||||||||||||||||||
Senior Notes(2) | Original Principal | 2016 Tenders, Repurchases and Equity Exchange | 2017 Exchange Offers and Repurchases | 2018 Tender Offers, Redemption and Debt Issuance | 2019 Tender Offers and Acquired Debt | 2020 Open Market Repurchase | Remaining Principal | ||||||||||||||||||||||||||||||||||
| 6.875% Senior notes due 2020 | $ | 900.0 | $ | (219.2) | $ | (229.9) | $ | (328.0) | $ | — | $ | — | $ | 122.9 | |||||||||||||||||||||||||||
| 4.70% Senior notes due 2021 | 1,500.0 | (817.0) | (413.3) | (156.2) | — | (12.8) | 100.7 | ||||||||||||||||||||||||||||||||||
4.875% Senior notes due 2022 (1) | — | — | — | — | 620.8 | — | 620.8 | ||||||||||||||||||||||||||||||||||
| 3.00% Exchangeable senior notes due 2024 | 849.5 | — | — | — | — | — | 849.5 | ||||||||||||||||||||||||||||||||||
| 4.50% Senior notes due 2024 | 625.0 | (1.6) | — | — | (320.0) | — | 303.4 | ||||||||||||||||||||||||||||||||||
4.75% Senior notes due 2024 (1) | — | — | — | — | 318.6 | — | 318.6 | ||||||||||||||||||||||||||||||||||
| 8.00% Senior notes due 2024 | — | — | 332.0 | — | (39.7) | — | 292.3 | ||||||||||||||||||||||||||||||||||
| 5.20% Senior notes due 2025 | 700.0 | (30.8) | — | — | (335.5) | — | 333.7 | ||||||||||||||||||||||||||||||||||
7.375% Senior notes due 2025 (1) | — | — | — | — | 360.8 | — | 360.8 | ||||||||||||||||||||||||||||||||||
| 7.75% Senior notes due 2026 | — | — | — | 1,000.0 | — | — | 1,000.0 | ||||||||||||||||||||||||||||||||||
| 7.20% Debentures due 2027 | 150.0 | — | — | — | (37.9) | — | 112.1 | ||||||||||||||||||||||||||||||||||
| 7.875% Senior notes due 2040 | 300.0 | — | — | — | — | 300.0 | |||||||||||||||||||||||||||||||||||
5.40% Senior notes due 2042 (1) | — | — | — | — | 400.0 | — | 400.0 | ||||||||||||||||||||||||||||||||||
| 5.75% Senior notes due 2044 | 1,025.0 | (24.5) | — | — | — | — | 1,000.5 | ||||||||||||||||||||||||||||||||||
5.85% Senior notes due 2044 (1) | — | — | — | — | 400.0 | — | 400.0 | ||||||||||||||||||||||||||||||||||
| Total | $ | 6,049.5 | $ | (1,093.1) | $ | (311.2) | $ | 515.8 | $ | 1,367.1 | $ | (12.8) | $ | 6,515.3 | |||||||||||||||||||||||||||
Investment in ARO and Notes Receivable from ARO
We consider our investment in ARO to be a significant component of our investment portfolio and an integral part of our long-term capital resources. We expect to receive cash from ARO in the future both from the maturity of our long-term notes receivableNotes Receivable from ARO and from the distribution of earnings from ARO.
The long-term notes receivable,Notes Receivable from ARO, which are governed by the laws of Saudi Arabia, earn interest at LIBOR plus two percent and mature during 2027 and 2028. In the event that ARO is unable to repay these notesthe Notes Receivable from ARO when they become due, we would require the prior consent of our joint venture partner to enforce ARO’s payment obligations. The notes receivable may be reduced by future Company obligations to the joint venture.
The distribution of earnings to the joint-venture partners is at the discretion of the ARO Boardboard of Managers,managers, consisting of 50/50 membership of managers appointed by Saudi Aramco and managers appointed by us, with approval required by both shareholders. The timing and amount of any cash distributions to the joint-venture partners cannot be predicted with certainty and will be influenced by various factors, including the liquidity position and long-term capital requirements of ARO. ARO has not made a cash distribution of earnings to its partners since its formation.
See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on our investment in ARO and notes receivableNotes Receivable from ARO.
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The following table summarizes the maturity schedule of our notes receivableNotes Receivable from ARO as of December 31, 20202023 (in millions):
| Maturity Date | Principal | ||||
| October 2027 | $ | ||||
| October 2028 | 177.7 | ||||
| Total | $ | ||||
Contractual Obligations
| Payments due by period | |||||||||||||||||||||||||||||
| 2021 | 2022 and 2023 | 2024 and 2025 | Thereafter | Total | |||||||||||||||||||||||||
Principal payments on long-term debt(1) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
New rig construction agreements(2)(3) | 83.9 | 165.0 | — | — | 248.9 | ||||||||||||||||||||||||
| Operating leases | 17.8 | 15.0 | 4.2 | 9.0 | 46.0 | ||||||||||||||||||||||||
Total contractual obligations(4) | $ | 101.7 | $ | 180.0 | $ | 4.2 | $ | 9.0 | $ | 294.9 | |||||||||||||||||||
| Payments due by period | |||||||||||||||||||||||||||||
| 2024 | 2025 and 2026 | 2027 and 2028 | Thereafter | Total | |||||||||||||||||||||||||
| Principal payments on long-term debt | $ | — | $ | — | $ | — | $ | 1,100.0 | $ | 1,100.0 | |||||||||||||||||||
| Interest payments on long-term debt | 92.1 | 184.3 | 184.3 | 138.1 | 598.8 | ||||||||||||||||||||||||
| Operating leases | 32.4 | 39.6 | 12.4 | 3.7 | 88.1 | ||||||||||||||||||||||||
Total contractual obligations(1) | $ | 124.5 | $ | 223.9 | $ | 196.7 | $ | 1,241.8 | $ | 1,786.9 | |||||||||||||||||||
In addition,connection with our 50/50 unconsolidated joint venture, we have a potential obligation to fund ARO for newbuild jackup rigs. The Shareholder Agreement specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups and paid 25% of the purchase price from cash on hand. The first rig, Kingdom 1, was delivered in the fourth quarter 2023, and the second is expected to be delivered in the first half of 2024. In October 2023, ARO entered into a $359.0 million term loan to finance the remaining newbuild payments due upon delivery and for general corporate purposes. The term loan matures in eight years following the related drawdown under the term loan and requires equal quarterly amortization payments during the term, with a 50% balloon payment due at maturity. The term loan bears interest based on the three-month Secured Overnight Financing Rate (SOFR) plus a margin ranging from 1.25% to 1.4%. Our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan.
ARO is expected to commit to orders for two additional newbuild jackups in the near term and intends for these newly ordered jackup rigs to be financed out of cash on hand or from operations or funds available from third-party financing. In the event ARO has insufficient cash from
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Other Commitments
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. These commitments includeAs of December 31, 2023, we were contingently liable for an aggregate amount of $128.8 million under outstanding letters of credit towhich guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of December 31, 2020,2023, we had insignificant collateral deposits in the amount of $12.6 million with respect to these agreements.
The following table summarizes our other commitments as of December 31, 20202023 (in millions):
| Commitment expiration by period | |||||||||||||||||||||||||||||
| 2021 | 2022 and 2023 | 2024 and 2025 | Thereafter | Total | |||||||||||||||||||||||||
| Letters of credit | $ | 88.5 | $ | 15.9 | $ | 7.2 | $ | 3.5 | $ | 115.1 | |||||||||||||||||||
| Commitment expiration by period | |||||||||||||||||||||||||||||
| 2024 | 2025 and 2026 | 2027 and 2028 | Thereafter | Total | |||||||||||||||||||||||||
| Letters of credit | $ | 116.8 | $ | — | $ | 12.0 | $ | — | $ | 128.8 | |||||||||||||||||||
In February 2024, one of our Malaysian subsidiaries received an unfavorable court decision regarding a tax assessment for the 2012-2017 tax years totaling approximately MYR 117.0 (approximately $26.0 million converted at current period-end exchange rates), including a late payment penalty. Based on this development, we may be required to pay the full amount to further contest the assessment. We have not recorded a liability for uncertain tax positions as of December 31, 2023, related to this assessment based on a more-likely-than-not threshold. We believe our tax returns are materially correct as filed, and will vigorously contest this assessment.
In December 2023, one of our Luxembourg subsidiaries received tax assessments for fiscal years 2019, 2020, 2021 and 2023 and a demand of payment from the Luxembourg tax authorities for an aggregate of approximately €115.0 million (approximately $127.0 million converted at current period-end exchange rates), including interest. In February 2024, we subsequently received notice from the Luxembourg tax authorities reducing the amount attributable to the 2023 payment demand by approximately €55.0 million resulting in a revised aggregate tax demand of approximately €60.0 million. We have recorded a liability for uncertain tax positions of approximately €60.0 million (approximately $66.0 million converted at current period-end exchange rates) in the fourth quarter of 2023 related to the assessments for the 2019-2021 tax years. We are vigorously contesting these assessments, including the validity and amount; however, the outcome of such challenges and related administrative proceedings and appeals cannot be predicted with certainty. An unfavorable outcome could result in a material impact on our financial position, operating results and cash flows.
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101101.0 million (approximately $77.7$69.0 million converted at current period-end exchange rates) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$4242.0 million payment (approximately $29$29.0 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have a $17.9an $18.8 million liability for unrecognizeduncertain tax benefitspositions relating to these assessments as of December 31, 2020.2023. We believe our tax returns are materially correct as filed, and we are vigorously contesting these assessments. Although the outcome of such assessments and related administrative proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.
See "Note 13 12 - Income Taxes" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on recentthese tax assessments.
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Share Repurchase Program
In 2022, our board of directors authorized a share repurchase program under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, they authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and is subject to compliance with applicable covenants and restrictions under our financing agreements. Common Shares may be repurchased under the repurchase program in open market purchases, private-negotiated purchases, through block trades, by effecting a tender offer, by way of accelerated share repurchase transactions or other derivative transactions, through the purchase of call options or the sale of put options, or otherwise, or by any combination of the foregoing. The manner, timing, pricing and amount of any repurchases are subject to our discretion and may be based upon a number of factors, including market conditions, our earnings, capital requirements, financial conditions, available cash resources and competing uses for cash that may arise in the future, debt agreement restrictions other factors. During the year ended December 31, 2023, we repurchased 3.0 million shares at an aggregate cost of $200.0 million, exclusive of fees incurred, at an average price of $66.77.
Effects of Climate Change and Climate Change Regulation
In an effort to reduce GHG emissions, governments have implemented or considered legislative and regulatory mechanisms to institute carbon pricing mechanisms, such as the European Union’s Emission Trading System, and to impose technical requirements to reduce carbon emissions. The Companies Act 2006 (StrategicGovernments have also proposed or implemented new or enhanced disclosure requirements related to climate change matters and Directors' Reports) Regulations 2013 now requires all quoted U.K. companies, including Valaris plc, to report their annual GHG emissions inthat may increase compliance and disclosure costs, such as the Company's directors' report.SEC’s 2022 proposed rules for a climate change reporting framework.
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During 2009, the United States Environmental Protection Agency (the “EPA”)EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings allowed the agency to proceed with the adoption and implementation of regulations to restrict GHG emissions under existing provisions of the Clean Air Act that establish permitting requirements, including emissions control technology requirements, for certain large stationary sources that are potential major sources of GHG emissions. These requirements for stationary sources took effect on January 2, 2011; however, in June 2014 the U.S. Supreme Court reversed a D.C. Circuit Court of Appeals decision upholding these rules and struck down the EPA’s greenhouse gas permitting rules to the extent they impose a requirement to obtain a federal air permit based solely on emissions of greenhouse gases. Large sources of other air pollutants, such as VOC or nitrogen oxides, could still be required to implement process or technology controls and obtain permits regarding emissions of greenhouse gases. The EPA has also adopted rules requiring annual monitoring and reporting of GHG emissions from specified sources in the U.S., including, among others, certain onshore and offshore oil and natural gas production facilities. Although a number of bills related to climate change have been introduced in the U.S. Congress in the past, comprehensive federal climate legislation has not yet been passed by Congress. If such legislation were to be adopted in the U.S., such legislation could adversely impact many industries. In the absence of federal legislation, almost half of the states have begun to address GHG emissions, primarily through the development or planned development of emission inventories or regional GHG cap and trade programs and commitments to contribute to meeting the goals of the Paris Agreement.
Future legislation or regulation of GHG emissions could occur pursuant to future treaty obligations, statutory or regulatory changes or new climate change legislation in the jurisdictions in which we operate. Depending on the particular program, we, or our customers, could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. It is uncertain whether any of these initiatives will be implemented. If such initiatives are implemented we do not believe thatand what the impact of such initiatives would have a direct, material adverse effect on our financial condition, operating results and cash flows in a manner different than our competitors.flows.
MARKET RISK
Interest Rate Risk
Our outstanding debt at December 31, 2023 consisted of petroleum products, which could potentially result in a reduction in demand for petroleum products and, consequently, our offshore contract drilling services.$1.1 billion aggregate principal amount of Second Lien Notes. We are currently unablesubject to predictinterest rate risk on our fixed-interest rate borrowings. Fixed rate debt, where the manner or extent of any such effect. Furthermore, oneinterest rate is fixed over the life of the long-term physical effectsinstrument, exposes us to changes in market interest rates impacting the fair value of climate change may be an increasethe debt.
Our Credit Agreement provides for commitments permitting borrowings of up to $375.0 million at December 31, 2023. As the interest rates for such borrowings are at variable rates, we are subject to interest rate risk. However, as of December 31, 2023, we had no outstanding borrowings under the Credit Agreement.
Our Notes Receivable from ARO historically accrued interest based on a one-year LIBOR rate. Effective December 2023, the Notes Receivable from ARO bear interest based on the one-year term SOFR rate, set as of the end of the year prior to the year applicable, plus 2.10%. As the Notes Receivable from ARO bear interest on the applicable SOFR rate determined at the end of the preceding year, the rate governing our interest income in 2024 has already been determined. A hypothetical 1% decrease to SOFR would decrease interest income for the year ended December 31, 2024 by $4.0 million based on the principal amount outstanding at December 31, 2023 of $402.7 million.
Foreign Currency Risk
Our functional currency is the U.S. dollar. As is customary in the severityoil and frequencygas industry, a majority of adverse weather conditions, such as hurricanes, which may increase our insurance costs orrevenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. We are exposed to foreign currency exchange risk retention, limit insurance availability or reduceto the areas in which, orextent the numberamount of days during which, our customers would contract for our drilling rigs in general andmonetary assets denominated in the Gulf of Mexicoforeign currency differs from our obligations in particular.the foreign currency or revenue earned differs from costs incurred in the foreign currency. We aredo not currently unable to predict the manner or extent of any such effect.hedge our foreign currency risk.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Concurrent with our emergence from bankruptcy, we applied fresh start accounting and elected to change our accounting policies related to property and equipment as well as materials and supplies. See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. Our significant accounting policies are included in "Note 1 - Description of the Business and Summary of Significant Accounting PoliciesPolicies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data". These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements.
We identify our critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and operating results and that require the most difficult, subjective and/or complex judgments regarding estimates in matters that are inherently uncertain. Our critical accounting policies are those related to property and equipment, impairment of long-lived assets, income taxes and pensions.pension and other post-retirement benefits.
Property and Equipment
Concurrent with our emergence from bankruptcy, we applied fresh start accounting and adjusted the carrying value of our drilling rigs to estimated fair value. See "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. As of December 31, 2020,2023, the carrying value of our property and equipment totaled $11.0$1.6 billion, which represented 85%38% of total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate our estimates, judgments and assumptions relative to the capitalized costs, useful lives and salvage values of our rigs.
We develop and apply property and equipment accounting policies that are designed to appropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
The judgments and assumptions used in determining the usefulnext overhaul or the economic lives of the components of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the significant components our rigs, would likely result in materially different asset carrying values and operating results.
The useful lives of our drilling rigsrig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rigsrig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
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Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
Our fleet of 1618 floater rigs excluding two rigs under construction, represented 54%62% of the gross cost and 55%63% of the net carrying amount of our depreciable property and equipment as of December 31, 2020.2023. Our fleet of 3635 jackup rigs represented 37%34% of the gross cost and 36%33% of the net carrying amount of our depreciable property and equipment as of December 31, 2020. Our floater rigs and jackup rigs are depreciated over 35 and 30 years, respectively, for newly constructed assets and over their estimated remaining useful lives for rigs obtained in a business combination.2023.
| Increase (decrease) in useful lives of our drilling rigs | Estimated (decrease) increase in depreciation expense that would have been recognized (in millions) | |||||||
| 10% | $(41.5) | |||||||
| 20% | (76.1) | |||||||
| (10%) | 50.4 | |||||||
| (20%) | 101.5 | |||||||
Income Taxes
We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2020,2023, our consolidated balance sheetConsolidated Balance Sheet included an $8.2a $825.2 million net deferred income tax asset, a $33.9$36.6 million liability for income taxes currently payable and a $286.1$224.0 million liability for unrecognized tax benefits, inclusive of interest and penalties.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results.
We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we obtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following:
•During recent years, the number of tax jurisdictions in which we conduct operations has increased.
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
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•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2020,2023, included (1) a weighted average discount rate of 2.30%4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 3.16%5.21% to determine net periodic pension cost and (3), an expected long-term rate of return on pension plan assets of 6.48%7.10% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations. A
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $125.6$60.1 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $5.6$4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.03%6.88% at December 31, 20202023 from 6.48%7.10% at December 31, 2019.2022. See "Note 1211 - Pension and Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on our pension and other postretirement benefit plans.
NEW ACCOUNTING PRONOUNCEMENTS
See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 20202023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris plc:Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valaris plcLimited and subsidiaries (the Company) as of December 31, 20202023 and 2019,2022, the related consolidated statements of operations, comprehensive loss,income (loss), and cash flows for each of the years in the three‑yeartwo-year period ended December 31, 20202023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020,Successor and Predecessor periods, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2021February 22, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note 21 to the consolidated financial statements, on March 3, 2021, the Company's operations and its ability to develop and execute its businessBankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan are subject to a high degree of risk and uncertainty associated with thefor reorganization under Chapter 11, voluntary petition, that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. Thewhich became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements doas of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not include any adjustments that might result from the outcome of this uncertainty.comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
71
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 1312 to the consolidated financial statements, the Company evaluatesevaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company'sCompany’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company'sCompany’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company'sCompany’s income tax
process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted inon evaluating the Company'sCompany’s interpretation of local tax laws and assessment of whether certain tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
72
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris plc:Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Valaris plcLimited and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20202023 and 2019,2022, the related consolidated statements of operations, comprehensive loss,income (loss), and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2020,2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements), and our report dated March 2, 2021February 22, 2024 expressed an unqualified opinion on those consolidated financial statements.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
VALARIS PLCLIMITED AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| OPERATING REVENUES | $ | 1,427.2 | $ | 2,053.2 | $ | 1,705.4 | |||||||||||
| OPERATING EXPENSES | |||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,458.6 | 1,806.0 | 1,319.4 | ||||||||||||||
| Loss on impairment | 3,646.2 | 104.0 | 40.3 | ||||||||||||||
| Depreciation | 540.8 | 609.7 | 478.9 | ||||||||||||||
| General and administrative | 214.6 | 188.9 | 102.7 | ||||||||||||||
| Total operating expenses | 5,860.2 | 2,708.6 | 1,941.3 | ||||||||||||||
| Other Operating Income | 118.1 | 0 | 0 | ||||||||||||||
| EQUITY IN LOSSES OF ARO | (7.8) | (12.6) | 0 | ||||||||||||||
| OPERATING LOSS | (4,322.7) | (668.0) | (235.9) | ||||||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||||
| Interest income | 19.7 | 28.1 | 14.5 | ||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $140.7 million for the year ended December 31, 2020) | (290.6) | (428.3) | (282.7) | ||||||||||||||
| Reorganization items, net | (527.6) | 0 | 0 | ||||||||||||||
| Other, net | 4.2 | 1,004.4 | (34.8) | ||||||||||||||
| (794.3) | 604.2 | (303.0) | |||||||||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (5,117.0) | (63.8) | (538.9) | ||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | |||||||||||||||||
| Current income tax expense (benefit) | (153.7) | 104.5 | 33.0 | ||||||||||||||
| Deferred income tax expense (benefit) | (105.7) | 23.9 | 56.6 | ||||||||||||||
| (259.4) | 128.4 | 89.6 | |||||||||||||||
| LOSS FROM CONTINUING OPERATIONS | (4,857.6) | (192.2) | (628.5) | ||||||||||||||
| LOSS FROM DISCONTINUED OPERATIONS, NET | 0 | 0 | (8.1) | ||||||||||||||
| NET LOSS | (4,857.6) | (192.2) | (636.6) | ||||||||||||||
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 2.1 | (5.8) | (3.1) | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO VALARIS | $ | (4,855.5) | $ | (198.0) | $ | (639.7) | |||||||||||
| LOSS PER SHARE - BASIC AND DILUTED | |||||||||||||||||
| Continuing operations | $ | (24.42) | $ | (1.14) | $ | (5.82) | |||||||||||
| Discontinued operations | 0 | 0 | (0.08) | ||||||||||||||
| $ | (24.42) | $ | (1.14) | $ | (5.90) | ||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||||||||||||
| Basic and Diluted | 198.9 | 173.4 | 108.5 | ||||||||||||||
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
VALARIS PLCLIMITED AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
(in millions)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| NET LOSS | $ | (4,857.6) | $ | (192.2) | $ | (636.6) | |||||||||||
| OTHER COMPREHENSIVE LOSS, NET | |||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive loss, net of income tax benefit of $5.9 million for the year ended December 31, 2019 | (76.3) | (21.7) | 0 | ||||||||||||||
| Net change in fair value of derivatives | (5.4) | 1.6 | (9.7) | ||||||||||||||
| Amortization of settlement gain, net of income tax expense of $(0.1) million for the year ended December 31, 2020 | (.2) | 0 | 0 | ||||||||||||||
| Reclassification of net (gains) losses on derivative instruments from other comprehensive loss into net loss | (11.6) | 8.3 | (1.0) | ||||||||||||||
| Other | (.6) | (.2) | (.5) | ||||||||||||||
| NET OTHER COMPREHENSIVE LOSS | (94.1) | (12.0) | (11.2) | ||||||||||||||
| COMPREHENSIVE LOSS | (4,951.7) | (204.2) | (647.8) | ||||||||||||||
| COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 2.1 | (5.8) | (3.1) | ||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS | $ | (4,949.6) | $ | (210.0) | $ | (650.9) | |||||||||||
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
VALARIS PLCLIMITED AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value amounts)
| December 31, | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||
| ASSETS | ASSETS | 2020 | 2019 | ||||||||||||||||||||||||||||
| CURRENT ASSETS | CURRENT ASSETS | ||||||||||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | $ | 325.8 | $ | 97.2 | ||||||||||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||||||||||
| Accounts receivable, net | Accounts receivable, net | 449.2 | 520.7 | ||||||||||||||||||||||||||||
| Other | 397.9 | 446.5 | |||||||||||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||||||||||||
| Other current assets | |||||||||||||||||||||||||||||||
| Total current assets | Total current assets | 1,172.9 | 1,064.4 | ||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | PROPERTY AND EQUIPMENT, AT COST | 13,209.3 | 18,393.8 | ||||||||||||||||||||||||||||
| Less accumulated depreciation | Less accumulated depreciation | 2,248.8 | 3,296.9 | ||||||||||||||||||||||||||||
| Property and equipment, net | Property and equipment, net | 10,960.5 | 15,096.9 | ||||||||||||||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | 452.9 | ||||||||||||||||||||||||||||
| INVESTMENT IN ARO | INVESTMENT IN ARO | 120.9 | 128.7 | ||||||||||||||||||||||||||||
| DEFERRED TAX ASSETS | |||||||||||||||||||||||||||||||
| OTHER ASSETS | OTHER ASSETS | 176.2 | 188.3 | ||||||||||||||||||||||||||||
| $ | 12,873.2 | $ | 16,931.2 | ||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||
| CURRENT LIABILITIES | CURRENT LIABILITIES | CURRENT LIABILITIES | |||||||||||||||||||||||||||||
| Accounts payable - trade | Accounts payable - trade | $ | 176.4 | $ | 288.2 | ||||||||||||||||||||||||||
| Accrued liabilities and other | Accrued liabilities and other | 250.4 | 417.7 | ||||||||||||||||||||||||||||
| Current maturities of long-term debt | 0 | 124.8 | |||||||||||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||||||||||||
| Total current liabilities | Total current liabilities | 426.8 | 830.7 | ||||||||||||||||||||||||||||
| LONG-TERM DEBT | LONG-TERM DEBT | 0 | 5,923.5 | ||||||||||||||||||||||||||||
| DEFERRED TAX LIABILITIES | |||||||||||||||||||||||||||||||
| OTHER LIABILITIES | OTHER LIABILITIES | 762.4 | 867.4 | ||||||||||||||||||||||||||||
| Total liabilities not subject to compromise | 1,189.2 | 7,621.6 | |||||||||||||||||||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | 0 | |||||||||||||||||||||||||||||
| Total liabilities | |||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | COMMITMENTS AND CONTINGENCIES | 0 | 0 | ||||||||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | VALARIS SHAREHOLDERS' EQUITY | VALARIS SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||
Class A ordinary shares, U.S. $0.40 par value, 206.1 and 205.9 million shares issued as of December 31, 2020 and 2019 | 82.5 | 82.4 | |||||||||||||||||||||||||||||
Class B ordinary shares, £1 par value, 50,000 shares issued as of December 31, 2020 and 2019 | .1 | .1 | |||||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | |||||||||||||||||||||||||||||||
| Stock warrants | |||||||||||||||||||||||||||||||
| Additional paid-in capital | Additional paid-in capital | 8,639.9 | 8,627.8 | ||||||||||||||||||||||||||||
| Retained (deficit) earnings | (4,183.8) | 671.7 | |||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income | (87.9) | 6.2 | |||||||||||||||||||||||||||||
Treasury shares, at cost, 6.6 million and 7.9 million shares as of December 31, 2020 and 2019 | (76.2) | (77.3) | |||||||||||||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||||||||||
| Accumulated other comprehensive income | |||||||||||||||||||||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | |||||||||||||||||||||||||||||||
| Total Valaris shareholders' equity | Total Valaris shareholders' equity | 4,374.6 | 9,310.9 | ||||||||||||||||||||||||||||
| NONCONTROLLING INTERESTS | NONCONTROLLING INTERESTS | (4.3) | (1.3) | ||||||||||||||||||||||||||||
| Total equity | Total equity | 4,370.3 | 9,309.6 | ||||||||||||||||||||||||||||
| $ | 12,873.2 | $ | 16,931.2 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
VALARIS PLCLIMITED AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||
| Net loss | $ | (4,857.6) | $ | (192.2) | $ | (636.6) | |||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities of continuing operations: | |||||||||||||||||
| Loss on impairment | 3,646.2 | 104.0 | 40.3 | ||||||||||||||
| Depreciation expense | 540.8 | 609.7 | 478.9 | ||||||||||||||
| Non-cash reorganization items, net | 436.4 | 0 | 0 | ||||||||||||||
| Deferred income tax expense (benefit) | (105.7) | 23.9 | 56.6 | ||||||||||||||
| Debtor in Possession financing fees and payments on Backstop Agreement | 40.0 | 0 | 0 | ||||||||||||||
| Debt discounts and other | 36.8 | 31.5 | (7.2) | ||||||||||||||
| Share-based compensation expense | 21.4 | 37.3 | 29.9 | ||||||||||||||
| Equity in losses of ARO | 7.8 | 12.6 | 0 | ||||||||||||||
| (Gain on) adjustment to bargain purchase | 6.3 | (637.0) | (1.8) | ||||||||||||||
| Amortization, net | 6.2 | (16.8) | (40.2) | ||||||||||||||
| (Gain) loss on debt extinguishment | (3.1) | (194.1) | 19.0 | ||||||||||||||
| Other | 6.9 | 9.9 | 26.2 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisition | (22.0) | (52.5) | (20.8) | ||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (12.1) | (13.2) | 0 | ||||||||||||||
| Net cash used in operating activities | (251.7) | (276.9) | (55.7) | ||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||
| Additions to property and equipment | (93.8) | (227.0) | (426.7) | ||||||||||||||
| Net proceeds from disposition of assets | 51.8 | 17.7 | 11.0 | ||||||||||||||
| Acquisition of Rowan, net of cash acquired | 0 | 931.9 | 0 | ||||||||||||||
| Maturities of short-term investments | 0 | 474.0 | 1,030.0 | ||||||||||||||
| Purchases of short-term investments | 0 | (145.0) | (919.0) | ||||||||||||||
| Net cash provided by (used in) investing activities | (42.0) | 1,051.6 | (304.7) | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||
| Borrowings on credit facility | 596.0 | 215.0 | 0 | ||||||||||||||
| Debtor in Possession financing fees and payments on Backstop Agreement | (40.0) | 0 | 0 | ||||||||||||||
| Repayments of credit facility borrowings | (15.0) | (215.0) | 0 | ||||||||||||||
| Reduction of long-term borrowings | (9.7) | (928.1) | (771.2) | ||||||||||||||
| Purchase of noncontrolling interests | (7.2) | 0 | 0 | ||||||||||||||
| Debt solicitation fees | 0 | (9.5) | 0 | ||||||||||||||
| Cash dividends paid | 0 | (4.5) | (17.9) | ||||||||||||||
| Proceeds from issuance of senior notes | 0 | 0 | 1,000.0 | ||||||||||||||
| Debt issuance costs | 0 | 0 | (17.0) | ||||||||||||||
| Other | (1.9) | (10.2) | (5.7) | ||||||||||||||
| Net cash provided by (used in) financing activities | 522.2 | (952.3) | 188.2 | ||||||||||||||
| Net cash provided by discontinued operations | 0 | 0 | 2.5 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | .1 | (.3) | (.6) | ||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 228.6 | (177.9) | (170.3) | ||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 97.2 | 275.1 | 445.4 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 325.8 | $ | 97.2 | $ | 275.1 | |||||||||||
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
VALARIS PLCLIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry. We currently own an offshore drilling rig fleet of 61 rigs,industry with drilling operations in almost every major offshore market across 5six continents. OurWe own the world's largest offshore drilling rig fleet, includes 11including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, 4four dynamically positioned semisubmersible rigs, 1one moored semisubmersible rig, and 4535 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional 7 rigs, We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet.eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning 9 countries on 5 continents.global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Chapter 11 Cases and Restructuring Support Agreement
On August 19, 2020 (the "Petition Date"“Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the "Debtors"“Debtors”), filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI)(the "Chapter (the “Chapter 11 Cases"Cases”). On August 18, 2020, the Debtors entered into the Restructuring Support Agreement (the "Original RSA")
In connection with certain senior note holders (collectively, the "Consenting Noteholders"). On February 5, 2021, the Debtors entered into the Amended Restructuring Support Agreement (the “Amended RSA”) with the Consenting Noteholders and holders of approximately 100% of the total commitments under our revolving credit facility (the “Consenting Lenders” and, together with the Consenting Noteholders, the “Consenting Creditors”), which contemplates that the Company will implement the restructuring through the Chapter 11 Cases, on and prior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a planseries of reorganizationtransactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
References to the various related transactions set forthfinancial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in or contemplated bythis Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Amended RSA.Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
See “Note 2 – Chapter 11 ProceedingsProceedings” for additional details regarding the Chapter 11 Cases.
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Fresh Start Accounting
On the Effective Date, the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we qualified for and Abilityadopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to Continue asour financial statements and notes on and prior to that date. Furthermore, the consolidated financial statements and notes have been presented with a Going Concern”black line division to delineate the lack of comparability between the Predecessor and Successor.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the Chapter 11 Cases and Amended RSA.fresh start accounting.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Valaris plc,Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses including certain gains and losses on our derivative instruments, are included in other,Other, net, in our consolidated statementConsolidated Statements of operations.Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in accumulatedAccumulated other comprehensive income on our consolidated balance sheet.Consolidated Balance Sheet. Net foreign currency exchange losses, inclusive of offsetting fair value derivatives, were $11.0 million, $7.4loss was $3.5 million, and $17.2gains were $12.2 million, $8.1 million and $13.4 million, and were included in other,Other, net, in our consolidated statementsConsolidated Statements of operationsOperations for the years ended December 31, 2020, 20192023 and 2018,2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
81
Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
There were no short-term investments as of December 31, 20202023 and 2019.2022. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our consolidated statementsConsolidated Statements of cash flowsCash Flows for the yearsyear ended December 31, 2019 and 2018.2022. To mitigate our credit risk, our investments in time deposits have historically been diversified across multiple, high-quality financial institutions.
Property and Equipment
All costs incurred in connection with the acquisition, construction, major enhancement and improvement of
assets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Costs incurred to place an asset into service are capitalized, including costs related to the initial mobilization of a newbuild drilling rig. Repair and maintenance costs are charged to contract drilling expense in the period in which they are incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed from the balance sheet, and the resulting gain or loss is included in contractOther, net in our Consolidated Statements of Operations.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling expense.rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from fourfive to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from seven10 to 30 years. Other equipment, including computer and communications hardware and software, costs, is depreciated over estimated useful lives ranging from threetwo to 6six years.
We evaluate the carrying value of our property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
We recorded pre-tax, non-cash impairment losses related to long-lived assets of $3.6 billion, $104.0$34.5 million and $40.3$756.5 million, during 2020, 2019in the year ended December 31, 2022 (Successor) and 2018,the four months ended April 30, 2021 (Predecessor), respectively. See "Note 67 - Property and Equipment" for additional information on our impairment charges.
Operating Revenues and Expenses
See "Note 34 - Revenue from Contracts with Customers" for information on our accounting policies for revenue recognition and certain operating costs that are deferred and amortized over future periods.
Income Taxes
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in currentCurrent income tax expense in our consolidated statementConsolidated Statements of operations.Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries through an intercompany rig sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. The income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Subject to applicable bankruptcy law, our Long-TermOur 2021 Management Incentive Plan (the “2018 LTIP”“MIP”) allows our Boardboard of Directorsdirectors to authorize shareequity-based grants to be settled in cash, shares or shares.a combination of shares and cash. Compensation expense for sharetime-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for shareperformance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
83
the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in cash is remeasured each quarter withthis estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost duringin the period in which the change in estimate occurs, except in the case of objectives based on changes ina market condition, such as our sharestock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our consolidated statementConsolidated Statements of operationsOperations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 1110 - Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement benefit plansBenefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our consolidated balance sheet,Consolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our consolidated statementConsolidated Statements of operations. For each of the years in the three-year period ended December 31, 2020, allOperations. All income attributable to noncontrolling interest was from continuing operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to the plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million warrants (the "Warrants") to the former holders of Legacy Valaris' equity to purchase common shares of Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028.
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Earnings Per Share
outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excludesexcluded non-vested shares. In each of the years in the three-year period ended December 31, 2020, our potentially dilutive instruments were not included in the computation of diluted EPS as the effect of including these shares in the calculation would have been anti-dilutive.
The following table is a reconciliation of loss from continuing operations attributable to Valaristhe weighted-average shares used in our basic and diluted EPS computations for each of the years in the three-year period ended December 31, 20202023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| 2020 | 2019 | 2018 | |||||||||||||||
| Loss from continuing operations attributable to Valaris | $ | (4,855.5) | $ | (198.0) | $ | (631.6) | |||||||||||
Income from continuing operations allocated to non-vested share awards (1) | 0 | (.1) | (.5) | ||||||||||||||
| Loss from continuing operations attributable to Valaris shares | $ | (4,855.5) | $ | (198.1) | $ | (632.1) | |||||||||||
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
Anti-dilutive share awards totaling 400,000, 300,000147,000 and 1.5 million192,000 were excluded from the computation of diluted EPS for the yearsyear ended December 31, 2020, 20192023 and 2018,2022 (Successor), respectively.
Due to the net loss position, anti-dilutive shares totaling 600,000 and 300,000, for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively, were excluded from the computation of diluted EPS.
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes") for which we had the option to settle in cash, shares or a combination thereof for the aggregate amount due upon conversion. However,On the commencementEffective Date, pursuant to the plan of the Chapter 11 Cases on August 19, 2020 constituted an event of default under the 2024 Convertible Notes. Any efforts to enforce paymentreorganization, all outstanding obligations under the 2024 Convertible Notes including any rights to requirewere cancelled and the repurchase byholders thereunder received the Companytreatment as set forth in the plan of reorganization. However, if the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. During each respective reporting period that ourLegacy Valaris average share price exceedshad exceeded the exchange price during a respective predecessor reporting period, an assumed number of shares required to settle the conversion obligation in excess of the principal amount will bewould have been included in our denominator for the computation of diluted EPS using the treasury stock method. OurThe Legacy Valaris average share price did not exceed the exchange price during the yearsfour months ended December 31, 2020, 2019 and 2018.April 30, 2021 (Predecessor).
New Accounting Pronouncements
Recently adopted accounting pronouncements
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedientsprovisions in Update 2020-04 were effective upon issuance and exceptions provided by the amendments do not applycould be applied prospectively to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. We areIn December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022, to December 31, 2024. Our long-term notes receivable from ARO (the "Notes Receivable from ARO"), has generated interest income on a LIBOR-based rate since inception of the note. In 2023, we amended the terms of the Notes Receivable from ARO whereby beginning in 2024, interest income is calculated on a Secured Overnight Financing Rate ("SOFR") based rate. The application of Update 2020-04 and ASU No. 2022-06 on this contract modification and the process of evaluating thechange in reference rates did not have a material impact this amendment will have on our consolidated financial statements.
Accounting pronouncements to be adopted
Improvements to Reportable Segment Disclosures - In August 2020,November 2023, the FASB issued ASU 2020-06,No. 2023-07, “Debt – Debt with ConversionSegment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("Update 2023-07"), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in Update 2023-07 require that a public entity disclose, on an annual and Other Options (Subtopic 470-20)interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and Derivativesany additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)”interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
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Improvements to Income Tax Disclosures - In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("Update 2020-06”2023-09"). ASU 2020-06 simplifies, which expands income tax disclosure requirements to include additional information related to the accounting forrate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in Update 2023-09 also remove disclosures related to certain financial instruments with characteristics of liabilitiesunrecognized tax benefits and equity, including convertible instruments and contracts in an entity’s own equity. The ASUdeferred taxes. Update 2023-09 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years,2024, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020.permitted. The amendments are required to be applied on a prospective basis, with an option to apply the guidance retrospectively. We are in the process of evaluatingcurrently assessing the impact this amendment may haveof the requirements on our consolidated financial statements.statements and disclosures.
With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our consolidated financial statements.
2. CHAPTER 11 PROCEEDINGS AND ABILITY TO CONTINUE AS A GOING CONCERN
Chapter 11 Cases and Emergence from Chapter 11
On August 19, 2020,the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors obtained joint administration of the Chapter 11 Cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
•Appointed six new members to the Company's board of directors to replace all of the directors of Legacy Valaris, other than the director also serving as President and Chief Executive Officer at the Effective Date, who was re-appointed pursuant to the plan of reorganization. All but one of the seven directors became directors as of the Effective Date and one became a director on July 1, 2021.
•Obligations under aLegacy Valaris' outstanding senior notes (the "Senior Notes") were cancelled and the related indentures were cancelled, except to the limited extent expressly set forth in the plan of reorganization pursuant toand the termsholders thereunder received the treatment as set forth in the plan of the Amended RSA:reorganization;
•Holders of the Company's outstanding senior notes ("Senior Notes") will receiveNotes received their pro rata share of (i) approximately 39%(1) 38.48%, or 28.9 million, of new common stock issued after consummation of the restructuring (the “New Equity”)Common Shares and (ii)(2) approximately 97.6% of the subscription rights to participate in the rights offering (the "Rights Offering") through which the Company will offer $550offered $550.0 million of new first lien secured notes (the "New Secured Notes"),the First Lien Notes, which includes the Backstop Premium (as defined below);backstop premium;
•Holders of the Senior Notes who participateparticipated in the Rights Offering will receivereceived their pro ratashare of approximately 29.3%, or 22.0 million, of the New Equity pursuant to the Rights Offering, together with the RCF Lenders (as defined below) who will receive their pro rata share of approximately 0.7% of the New Equity,Common Shares, and senior noteholders who agreed to backstop the Rights Offering will receivereceived their pro rata share of approximately 2.63%, or 2.0 million of the New Equity, together with 0.07% of the New Equity reserved for RCF LendersCommon Shares and approximately $48.8 million in New SecuredFirst Lien Notes reserved foras a backstop premium;
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•Certain Revolving Credit Facility lenders ("RCF Lenders") who participated in the holdersRights Offering received their pro rata share of approximately 0.7%, or 0.5 million Common Shares, RCF Lenders who agreed to backstop the Senior NotesRights Offering received their pro rata share of 0.07%, or 49,500 of Common Shares and approximately $1.2 million in New SecuredFirst Lien Notes reserved for the RCF Lenders (the "Backstop Premium");as a backstop premium;
•Senior noteholders, solely with respect to Pride International LLC's ("Pride") 6.875% senior notes due 2020 and 7.875% senior notes due 2040, Ensco International 7.20% Debentures due 2027, and the Company's 4.875% senior notes due 2022, 4.75% senior notes due 2024, 7.375% senior notes due 2025, 5.4% senior notes due 2042 and 5.85% senior notes due 2044, will receivereceived an aggregate cash payment of $26$26.0 million in connection with settlement of certain alleged claims against the Company;
•Lenders under the revolving credit facility (“RCF Lenders”) were provided an option to select between two alternative treatments: (1) the ability to participate on a pro rata basis in up to 14% of the Rights Offering plus a recovery of up to 30.8% of the New Equity and up to $45 million in cash, or (2) a pro rata recovery of up to 27.8% of the New Equity and up to $116.2 million in cash. Following the results of that election, theThe two RCF Lenders who chose to participate in the Rights Offering will receivereceived their pro rata share of (1) 5.3%, or 4.0 million Common Shares (2) approximately 5.3%2.427% of the New Equity, (2) approximately 2.4% of the New SecuredFirst Lien Notes (and associated New Equity)Common Shares), (3) approximately $7.8 million in cash, and (iv)(4) their pro rata share of the Backstop Premium.backstop premium. The RCF Lenders who entered into the Amended RSAamended restructuring support agreement and elected not to participate in the Rights Offering will receivereceived their pro rata share of (1) approximately 23.0%22.980%, or 17.2 million of the New Equity,Common Shares and (2) approximately $96.1 million in cash;
•Holders of general unsecured claims willare entitled to receive payment in full or reinstatement pursuantwithin ninety days after the later of (a) the Effective Date and (b) the date such claim comes due;
•0.4 million Common Shares were issued and $5.0 million was paid to the Bankruptcy Code (excluding claims against the entities party to, or guaranteeing, the new build contracts to be rejected by the Company, which shall receive their liquidation value unless otherwise agreed)Daewoo Shipbuilding & Marine Engineering Co., Ltd (the "Shipyard");
•IfLegacy Valaris Class A ordinary shares were cancelled and holders received 5.6 million in Warrants exercisable for one Common Share per Warrant at initial exercise price of equity interests vote$131.88 per Warrant, in each case as a class in support of the restructuring, they will each receive their pro rata share of 7-year warrantsmay be adjusted from time to purchase up to 7% of New Equity (subject to dilution), with a strike price set at a price per share equaltime pursuant to the value at whichapplicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028;
•All equity-based awards of Legacy Valaris that were outstanding were cancelled;
•On the senior noteholders would receiveEffective Date, Valaris Limited entered into a 100% recovery on their claims including accrued interest up toregistration rights agreement with certain parties who received Common Shares;
•On the PetitionEffective Date, as applicable;Valaris Limited entered into a registration rights agreement with certain parties who received First Lien Notes; and
•ToThere were no borrowings outstanding against our debtor-in-possession ("DIP") facility and there were no DIP claims that were not due and payable on, or that otherwise survived, the extent amounts are borrowed underEffective Date. The DIP Credit Agreement terminated on the DIP Facility (as described below), lenders under the DIP Facility will receive payment in full in cash, unless otherwise agreed, and certain other fees owed to the DIP Facility lenders.Effective Date.
In accordance with the plan of reorganization, Valaris Limited adopted the 2021 Management Incentive Plan (the “MIP”) as of the Effective Date and authorized and reserved 9.0 million Common Shares for a periodissuance pursuant to equity incentive awards to be granted under the MIP, which may be in the form of 15 business daysincentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and cash awards or any combination thereof. See "Note 10 - Share Based Compensation" for more information on awards granted under the MIP after the commencement of the Chapter 11 Cases (the “Joinder Period”), qualified holders of Senior Notes claims, including the Consenting Noteholders, were eligible to become backstop parties (the “Noteholder Backstop Parties”). All Noteholder Backstop Parties were required to join the Original RSA. The expiration of the Joinder Period was extended on September 10, 2020, to September 14, 2020 upon which date we had support for the Original RSA from holders of approximately 72% of the aggregate amount of our Senior Notes outstanding.Effective date.
Prior to the holders of approximately 72%Effective Date, liabilities subject to compromise were comprised primarily of the aggregate amountbalance of our outstandingpre-petition Senior Notes who supportedof $6.5 billion, amounts drawn under the Original RSA.Revolving Credit Facility as of the Petition Date of $581.0 million and the corresponding unpaid accrued interest as of the Petition Date of $203.5 million.
The Amended RSA contains certain covenantscontractual interest expense on the part of Valaris and the Consenting Creditors, including commitments by the Consenting Creditors to vote in favor of a plan of reorganization and commitments of Valaris and the Consenting Creditors to negotiate in good faith to finalize the documents and agreements governing the restructuring. The Amended RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the Amended RSA.
Reorganization Items
Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our Consolidated StatementStatements of Operations for the year ended December 31, 2020.2022, eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor). These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases all adjustments made toand the carrying amounteffects of certain pre-petition liabilities reflecting claims expected to be allowed by the Bankruptcy Court, contractemergence from bankruptcy, including the application of fresh start accounting.
The components of reorganization items, related to rejecting and amending certain operating leases ("Contract items") and DIP Facility fees.net were as follows (in millions):
| Successor | Predecessor | ||||||||||||||||||||||
| Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||
| Professional fees | $ | 2.4 | $ | 17.2 | $ | 93.4 | |||||||||||||||||
| Contract items | — | (1.7) | 3.9 | ||||||||||||||||||||
| Reorganization items (fees) | 2.4 | 15.5 | 97.3 | ||||||||||||||||||||
| Contract items | — | — | 0.5 | ||||||||||||||||||||
| Backstop premium | — | — | 30.0 | ||||||||||||||||||||
| Gain on settlement of liabilities subject to compromise | — | — | (6,139.0) | ||||||||||||||||||||
| Issuance of Common Shares for backstop premium | — | — | 29.1 | ||||||||||||||||||||
| Issuance of Common Shares to the Shipyard | — | — | 5.4 | ||||||||||||||||||||
| Write-off of unrecognized share-based compensation expense | — | — | 16.0 | ||||||||||||||||||||
| Impact of newbuild contract amendments | — | — | 350.7 | ||||||||||||||||||||
| Loss on fresh start adjustments | — | — | 9,194.6 | ||||||||||||||||||||
| Reorganization items (non-cash) | — | — | 3,487.3 | ||||||||||||||||||||
| Total reorganization items, net | $ | 2.4 | $ | 15.5 | $ | 3,584.6 | |||||||||||||||||
| Reorganization items (fees) paid | $ | 2.4 | $ | 14.7 | $ | 59.0 | |||||||||||||||||
| Reorganization items (fees) unpaid | $ | — | $ | 0.8 | $ | 38.3 | |||||||||||||||||
3. FRESH START ACCOUNTING
Applicability of Fresh Start Accounting
Upon emergence from bankruptcy, we qualified for and applied fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes because (1) the holders of the then existing Class A ordinary shares of the Predecessor received less than 50 percent of the Common Shares of the Successor outstanding upon emergence and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the total of all post-petition liabilities and allowed claims.
The reorganization value derived from the range of enterprise values associated with the plan of reorganization was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes). The amount of deferred income taxes recorded was determined in accordance with the applicable income tax accounting standard. The April 30, 2021 fair values of the Company’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets.
Reorganization Value
The reorganization value represents the fair value of the Successor's total assets and was derived from the enterprise value associated with the plan of reorganization, which represents the estimated fair value of an entity's long-term debt and equity less unrestricted cash upon emergence from chapter 11. As set forth in the disclosure statement and approved by the Bankruptcy Court, third-party valuation advisors estimated the enterprise value to be between $1,860.0 million and $3,145.0 million. The enterprise value range of the reorganized Debtors was determined primarily by using a discounted cash flow analysis. The value agreed in the plan of reorganization is indicative of an enterprise value at the low end of this range, or $1,860.0 million.
The following table reconciles the enterprise value to the estimated fair value of Successor Common Shares as of the Effective Date (in millions, except per share value):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Less: Fair value of debt | (544.8) | ||||
| Less: Warrants | (16.4) | ||||
| Less: Noncontrolling interest | 1.1 | ||||
| Less: Pension and other post-retirement benefits liabilities | (189.0) | ||||
| Less: Adjustments not contemplated in Enterprise Value | (639.0) | ||||
| Fair value of Successor Common Shares | $ | 1,079.5 | |||
| Shares issued upon emergence | 75.0 | ||||
| Per share value | $ | 14.39 | |||
The following table reconciles the enterprise value to the reorganization value as of the Effective Date (in millions):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Plus: Non-interest bearing current liabilities | 346.0 | ||||
| Less: Adjustments not contemplated in Enterprise Value | (218.0) | ||||
| Reorganization value of Successor assets | $ | 2,595.6 | |||
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Adjustments not contemplated in Enterprise Value represent certain obligations of the Successor that were either not contemplated or contemplated in a different amount in the forecasted cash flows of the enterprise valuation performed by third-party valuation advisors that, had they incorporated those anticipated cash flows into their analysis, the resulting valuation would have been different. For the reconciliation of Reorganization value of Successor assets, this item includes certain tax balances, contract liabilities, as well as an adjustment for the fair value of pension obligations. The reconciliation to Successor Common Share value includes these same reconciling items as well as other current and non-current liabilities of the Successor at the emergence.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in the valuation utilizing assumptions regarding future day rates, utilization, operating costs and capital requirements as of the emergence date. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
Valuation Process
The fair values of the Company's principal assets and liabilities including property, plant and equipment as well as our 50% equity interest in ARO and our Notes Receivable from ARO, options to purchase VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships"), the First Lien Notes, pensions and Warrants were estimated with the assistance of third-party valuation advisors.
Property, Plant and Equipment
The valuation of the Company’s drilling rigs was estimated by using an income approach or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs, reactivation costs and capital requirements. In developing these assumptions, forecasted day rates and utilization took into account current market conditions and our anticipated business outlook. The cash flows were discounted at our weighted average cost of capital, which was derived from a blend of our after-tax cost of debt and our cost of equity and computed using public share price information for similar offshore drilling market participants, certain U.S. Treasury rates and certain risk premiums specific to the Company.
Our remaining property and equipment, including owned real estate and other equipment, was valued using a cost approach, in which the estimated replacement cost of the assets was adjusted for physical depreciation and obsolescence, where applicable, to arrive at estimated fair value.
The estimated fair value of our property and equipment includes an adjustment to reconcile to our reorganization value.
Notes Receivable from ARO
The fair value of the Notes Receivable from ARO was estimated using an income approach to value the forecasted cash flows attributed to the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium.
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Investment in ARO
We estimated the fair value of the equity investment in ARO primarily by applying an income approach, using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate.
Options to Purchase Newbuild Drillships
The fair value of the options to purchase Newbuild Drillships was estimated using an option pricing model utilizing the estimated fair value of a newbuild rig, estimated purchase price upon exercise of the options, the holding period, equity volatility and the risk-free rate.
First Lien Notes
The fair value of the First Lien Notes was determined to approximate the par value based on third-party valuation advisors’ analysis of the Company’s collateral coverage, financial metrics, and interest rate for the First Lien Notes relative to market rates of recent placements of a similar term for industry participants with similar credit risk.
Pensions
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Upon emergence, our pension and other postretirement plans were remeasured as of the Effective Date. Key assumptions at the Effective Date included (1) a weighted average discount rate of 2.81% to determine pension benefit obligations and (2) an expected long-term rate of return on pension plan assets of 6.03% to determine net periodic pension cost.
Warrants
The fair value of the Warrants was determined using an option pricing model considering the contractual terms of the Warrant issuance. The key market data assumptions for the option pricing model are the estimated volatility and the risk-free rate. The volatility assumption was estimated using market data for offshore drilling market participants with consideration for differences in leverage. The risk-free rate assumption was based on U.S. Treasury Constant Maturity rates with a comparable term.
Condensed Consolidated Balance Sheet
The adjustments included in the following Condensed Consolidated Balance Sheet reflect the effects of the transactions contemplated by the plan of reorganization and executed by the Company on the Effective Date (reflected in the column “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded.
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| As of April 30, 2021 | |||||||||||||||||||||||
| Predecessor | Reorganization Adjustments | Fresh Start Accounting Adjustments | Successor | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 280.2 | $ | 327.4 | (a) | $ | — | $ | 607.6 | ||||||||||||||
| Restricted cash | 45.7 | 42.7 | (b) | — | 88.4 | ||||||||||||||||||
| Accounts receivable, net | 425.9 | — | — | 425.9 | |||||||||||||||||||
| Other current assets | 370.1 | 1.5 | (c) | (281.1) | (o) | 90.5 | |||||||||||||||||
| Total current assets | 1,121.9 | 371.6 | (281.1) | 1,212.4 | |||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET | 10,026.4 | (417.6) | (d) | (8,699.7) | (p) | 909.1 | |||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | — | (214.4) | (q) | 228.3 | ||||||||||||||||||
| INVESTMENT IN ARO | 123.9 | — | (43.4) | (r) | 80.5 | ||||||||||||||||||
| OTHER ASSETS | 166.4 | (10.0) | (e) | 8.9 | (s) | 165.3 | |||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
| Accounts payable - trade | $ | 161.5 | $ | 13.1 | (f) | $ | (0.5) | (t) | $ | 174.1 | |||||||||||||
| Accrued liabilities and other | 290.7 | (12.4) | (g) | (61.8) | (u) | 216.5 | |||||||||||||||||
| Total current liabilities | 452.2 | 0.7 | (62.3) | 390.6 | |||||||||||||||||||
| LONG-TERM DEBT | — | 544.8 | (h) | — | 544.8 | ||||||||||||||||||
| OTHER LIABILITIES | 706.2 | (55.2) | (i) | (85.6) | (v) | 565.4 | |||||||||||||||||
| Total liabilities not subject to compromise | 1,158.4 | 490.3 | (147.9) | 1,500.8 | |||||||||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | (7,313.7) | (j) | — | — | ||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| Predecessor Class A ordinary shares | 82.5 | (82.5) | (k) | — | — | ||||||||||||||||||
| Predecessor Class B ordinary shares | 0.1 | (0.1) | (k) | — | — | ||||||||||||||||||
| Successor common shares | — | 0.8 | (l) | — | 0.8 | ||||||||||||||||||
| Successor stock warrants | — | 16.4 | (m) | — | 16.4 | ||||||||||||||||||
| Predecessor additional paid-in capital | 8,644.0 | (8,644.0) | (k) | — | — | ||||||||||||||||||
| Successor additional paid-in capital | — | 1,078.7 | (l) | — | 1,078.7 | ||||||||||||||||||
| Retained deficit | (5,147.4) | 14,322.6 | (n) | (9,175.2) | (w) | — | |||||||||||||||||
| Accumulated other comprehensive loss | (93.4) | — | 93.4 | (x) | — | ||||||||||||||||||
| Predecessor treasury shares | (75.5) | 75.5 | (k) | — | — | ||||||||||||||||||
| Total Valaris shareholders' equity | 3,410.3 | 6,767.4 | (9,081.8) | 1,095.9 | |||||||||||||||||||
| NONCONTROLLING INTERESTS | (1.1) | — | — | (1.1) | |||||||||||||||||||
| Total equity | 3,409.2 | 6,767.4 | (9,081.8) | 1,094.8 | |||||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
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Reorganization Adjustments
(a) Cash
Represents the reorganization adjustments (in millions):
| Receipt of cash for First Lien Notes | $ | 500.0 | |||
| Loan proceeds from backstop lenders | 20.0 | ||||
| Funds received for liquidation of rabbi trust related to certain employee benefits | 17.6 | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Transfer of funds for payment of certain professional fees to escrow account | (42.7) | ||||
| Payment for certain professional services fees | (29.0) | ||||
| Various other | (8.6) | ||||
| $ | 327.4 | ||||
(b) Restricted cash
Reflects the reorganization adjustment to record the transfer of cash for payment of certain professional fees to restricted cash, which were held in escrow until billings from professionals were received and reconciled at which time the funds in the account were released.
(c) Other current asset
Reflects certain prepayments incurred upon emergence.
(d) Property and Equipment, net
Reflects the reorganization adjustment to remove $417.6 million of work-in-process related to the Newbuild Drillships. These values were removed from property and equipment, net, based on the terms of the amended agreements with the Shipyard. As a result of the option to take delivery, we removed the historical work-in-process balances from the balance sheet.
(e) Other assets
Represents the reorganization adjustments (in millions):
| Liquidation of rabbi trust related to certain employee benefits | $ | (17.6) | |||
| Elimination of right-of-use asset associated with Newbuild Drillships | (5.5) | ||||
| Fair value of options to purchase Newbuild Drillships | 13.1 | ||||
| $ | (10.0) | ||||
Our supplemental executive retirement plans are non-qualified plans that provided eligible employees an opportunity to defer a portion of their compensation for use after retirement. The plans were frozen to the entry of new participants in 2019 and to future compensation deferrals as of January 1, 2020. Upon emergence, assets previously held in a rabbi trust maintained for the plan were liquidated and the plan was amended.
In accordance with the amended agreement with the Shipyard, our leases were terminated and we have eliminated the historical right-of-use asset associated with the berthing locations of Newbuild Drillships.
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Additionally, upon effectiveness of the plan of reorganization, the amended agreement with the Shipyard provides the Company with the option to purchase the Newbuild Drillships. The reorganization adjustments include an asset that reflects the fair value of the option to purchase the Newbuild Drillships and embedded feature related to the ability, under the amended agreements with the Shipyard, for the equity issued pursuant to this arrangement to be put to the Company for $8.0 million of consideration for each rig, should we choose to take delivery.
(f) Accounts payable - trade
Reflects the following reorganization adjustments (in millions):
| Professional fees incurred upon emergence | $ | 26.1 | |||
| Payment of professional fees incurred prior to emergence | (12.6) | ||||
| Payment of certain accounts payable incurred prior to emergence | (0.4) | ||||
| $ | 13.1 | ||||
(g) Accrued liabilities and other
Reflects the following reorganization adjustments (in millions):
| Elimination of lease liabilities associated with Newbuild Drillships | $ | (5.0) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.1) | ||||
| Payment of certain accrued liabilities incurred prior to emergence | (3.3) | ||||
| $ | (12.4) | ||||
In accordance with the amended agreement with the Shipyard, our leases were terminated and we eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships. Accrued post-petition holding costs were also eliminated as a result of the amendments made effective upon emergence. Additionally, reorganization adjustments to accrued liabilities and other includes an amount primarily related to payment of professional fees incurred prior to emergence.
(h) Long-term debt
Reflects the reorganization adjustment to record the issuance of the $550.0 million aggregate principal amount of First Lien Notes and debt issuance costs of $5.2 million.
(i) Other liabilities
Reflects the following reorganization adjustments (in millions):
| Elimination of construction contract intangible liabilities associated with Newbuild Drillships | $ | (49.9) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.7) | ||||
| Elimination of lease liabilities associated with Newbuild Drillships | (0.6) | ||||
| $ | (55.2) | ||||
The reorganization adjustments to other liabilities primarily relate to the elimination of construction contract intangible liabilities associated with the Newbuild Drillships. These construction contract intangible liabilities were recorded in purchase accounting for the original contracting entity. As the amended contract was structured as an option whereby we had the right, not the obligation to take delivery of the rigs, there was no longer an intangible liability associated with the contracts.
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We have eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships and accrued post-petition holding costs as described in (g) above.
(j) Liabilities subject to compromise
Reflects the following reorganization adjustments (in millions):
| Settlement of liabilities subject to compromise | $ | 7,313.7 | |||
| Issuance of common stock to Predecessor creditors | (721.0) | ||||
| Issuance of common stock to backstop parties | (323.8) | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Gain on settlement of liabilities subject to compromise | $ | 6,139.0 | |||
(k) Predecessor ordinary shares, additional paid-in capital and treasury shares
Represents the cancellation of the Predecessor's ordinary shares of $82.6 million, additional paid-in capital of $8,644.0 million and treasury stock of $75.5 million.
(l) Successor common shares and additional paid-in capital
Represents par value of 75.0 million new Common Shares of $0.8 million and capital in excess of par value of $1,078.7 million.
(m) Successor stock warrants
On the Effective Date and pursuant to the plan of reorganization, Valaris Limited issued an aggregate of 5.6 million Warrants exercisable for up to an aggregate of 5.6 million Common Shares to former holders of Legacy Valaris' equity interests. The fair value of the Warrants as of the Effective Date was $16.4 million.
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(n) Retained deficit
Represents the reorganization adjustments to total equity as follows (in millions):
| Gain on settlement of liabilities subject to compromise | $ | (6,139.0) | |||
| Issuance of Common Shares for backstop premium | 29.1 | ||||
| Issuance of Common Shares to the Shipyard | 5.4 | ||||
| Write-off of unrecognized share-based compensation expense | 16.0 | ||||
| Professional fees and success fees | 35.9 | ||||
| Backstop premium | 30.0 | ||||
| Impact of newbuild contract amendments | 350.7 | ||||
| Reorganization items, net | (5,671.9) | ||||
| Cancellation of Predecessor common shares | (82.6) | ||||
| Cancellation of Predecessor treasury shares | 75.5 | ||||
| Cancellation of Predecessor additional paid in capital | (7,856.4) | ||||
| Cancellation of equity component of Predecessor convertible notes | (220.0) | ||||
| Cancellation of Predecessor cash and equity compensation plans | (583.6) | ||||
| Fair value of Warrants | 16.4 | ||||
| $ | (14,322.6) | ||||
Fresh Start Adjustments
(o) Other current assets
Reflects the fresh start adjustments to record the estimated fair value of other current assets as follows (in millions):
| Elimination of materials and supplies | $ | (260.8) | |||
| Elimination of historical deferred contract drilling expenses | (20.3) | ||||
| $ | (281.1) | ||||
Primarily reflects the fresh start adjustment to eliminate the historical balance for materials and supplies as the result of a change in accounting policies upon emergence. Historically, we recognized materials and supplies on the balance sheet when purchased and subsequently expensed items when consumed. Upon emergence from bankruptcy, we elected to change our accounting policies related to materials and supplies whereby materials and supplies will be expensed as a period cost when received. Additionally, a customer arrangement provides that we take title to their materials and supplies for the duration of the contract and return or pay cash for them at the termination of the contract. Together with our policy change on materials and supplies, we elected to record these assets and the obligation to our customer on a net basis as opposed to a gross basis.
The fresh start adjustment for the elimination of historical deferred contract drilling expenses primarily relates to deferred mobilization costs, deferred contract preparation costs and deferred certification costs. Costs incurred for mobilization and contract preparation prior to the commencement of drilling services are deferred and subsequently amortized over the term of the related drilling contract. Additionally, we must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. These deferred costs had no future economic benefit and were eliminated from the fresh start financial statements.
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(p) Property and equipment, net
Reflects the fresh start adjustments to historical amounts to record the estimated fair value of property and equipment.
Furthermore, upon emergence from bankruptcy, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components. Prior to emergence, we recorded our drilling rigs as a single asset with a useful life ascribed by the expected useful life of that asset.
(q) Notes Receivable from ARO
Reflects the fresh start adjustment to record the estimated fair value of the Notes Receivable from ARO.
(r) Investment in ARO
Reflects the fresh start adjustment to record the estimated fair value of the equity investment in ARO.
(s) Other assets
Reflects the fresh start adjustments to record the estimated fair value of other assets as follows (in millions):
| Deferred tax impacts of certain fresh start adjustments | $ | 21.1 | |||
| Fair value of contracts with customers | 8.5 | ||||
| Fair value adjustments to right-of-use assets | 0.4 | ||||
| Elimination of historical deferred contract drilling expenses | (16.5) | ||||
| Elimination of other deferred costs | (4.6) | ||||
| $ | 8.9 | ||||
The fresh start adjustment for deferred income tax assets represents the estimated incremental deferred income taxes, which reflects the tax effect of the differences between the estimated fair value of certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to record the estimated fair value of contracts with customers represents the intangible assets recognized for firm customer contracts in place at the Effective Date that have favorable contract terms as compared to current market day rates for comparable drilling rigs.The various factors considered in the adjustment were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the emergence date. The intangible assets are computed based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to right-of-use assets reflects the remeasuring of our operating leases as of the emergence date. Certain operating leases had unfavorable terms as of the emergence date, and as a result the right-of-use asset for such leases did not equal the lease liability upon emergence.
The fresh start adjustment to eliminate historical deferred contract drilling expenses reflects the noncurrent portion of historical deferred contract drilling expenses described in (o) above as well as the elimination of customer contract intangibles previously recorded in purchase accounting for a 2019 transaction.
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The fresh start adjustments to eliminate other deferred costs reflect non-operational deferred costs that had no future economic benefit.
(t) Accounts payable - trade
The fresh start adjustment to accounts payable trade reflects the write off of certain deferred amounts related to our operating leases. This value was eliminated through the remeasurement of our leases as of the emergence date.
(u) Accrued liabilities and other
Reflects the fresh start adjustments to record the estimated fair value of current liabilities as follows (in millions):
| Elimination of customer payable balance | $ | (36.8) | |||
| Elimination of historical deferred revenues | (25.9) | ||||
| Fair value of contracts with customers | 0.5 | ||||
| Fair value adjustment to lease liabilities | 0.4 | ||||
| $ | (61.8) | ||||
The fresh start adjustment to eliminate the customer payable balance is related to the change in accounting policy to present the balance on a net basis.
The fresh start adjustment to eliminate historical deferred revenues is primarily related to amounts previously received for the reimbursement for capital upgrades, upfront contract deferral fees and mobilization. Such amounts are deferred and subsequently amortized over the term of the related drilling contract. The deferred revenue did not represent any future performance obligations and was therefore eliminated as a fresh start accounting adjustment.
The fresh start adjustment to record the estimated fair value of contracts with customers reflects the intangible liabilities recognized for firm customer contracts in place at the Effective Date that have unfavorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the adjustment and computation of the intangible liabilities are described in (s) above. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(v) Other liabilities
Reflects the fresh start adjustments to record the estimated fair value of other liabilities as follows (in millions):
| Adjustment to fair value of pension and other post-retirement plan liabilities | $ | (82.7) | |||
| Elimination of historical deferred revenue | (5.9) | ||||
| Deferred tax impacts of certain fresh start adjustments | 1.7 | ||||
| Fair value adjustments to lease liabilities | 1.1 | ||||
| Fair value adjustments to other liabilities | 0.2 | ||||
| $ | (85.6) | ||||
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The fresh start adjustment to fair value pension and other post-retirement plan liabilities results from the remeasurement of the pension and other post-retirement benefit plans at the emergence date.
The fresh start adjustment to eliminate deferred revenues reflects the noncurrent portion of deferred revenues described in (u) above.
The fresh start adjustment for deferred income tax liabilities represents the estimated incremental deferred taxes, which reflects the tax effect of the differences between the estimated fair value certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(w) Retained Deficit
Reflects the fresh start adjustments to retained deficit as follows (in millions):
| Fair value adjustments to prepaid and other current assets | $ | (281.1) | |||
| Fair value adjustments to property | (8,699.7) | ||||
| Fair value of intangible assets | 8.5 | ||||
| Fair value adjustment to investment in ARO | (43.4) | ||||
| Fair value adjustment to note receivable from ARO | (214.4) | ||||
| Fair value adjustments to other assets | (20.7) | ||||
| Fair value adjustments to other current liability | 62.8 | ||||
| Fair value of intangible liabilities | (0.5) | ||||
| Fair value adjustment to other liabilities | 87.3 | ||||
| Elimination of Predecessor accumulated other comprehensive loss | (93.4) | ||||
| Total fresh start adjustments included in reorganization items, net | $ | (9,194.6) | |||
| Tax impact of fresh start adjustments | 19.4 | ||||
| $ | (9,175.2) | ||||
(x) Accumulated other comprehensive loss
Reflects the fresh start adjustments for the elimination of Predecessor accumulated other comprehensive loss through Reorganization items, net.
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.
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Our drilling contracts contain a lease component and we have elected to apply the practical expedient provided under Accounting Standards Codification ("ASC") 842 to not separate the lease and non-lease components and apply the revenue recognition guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.
The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of December 31, 20202023 was between approximately one1 month and two5 years.
Day Rate Drilling Revenue
Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly basis or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices are typically range from 30 to 45 days.
Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
Contract Termination - VALARIS DS-11
In 2021, a contract was awarded to VALARIS DS-11 for a project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract. As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Consolidated Statements of Operations for the year ended December 31, 2022 (Successor).
Mobilization / Demobilization Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in operatingOperating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in contractContract drilling expense.
Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
Capital Upgrade / Contract Preparation Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation generally for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and other contract preparation work are recorded as a contract liability and amortized on a straight-line basis over the contract term to operatingOperating revenues. Costs
Revenues Related to Reimbursable Expenses
We generally receive reimbursements from our customers for purchases of supplies, equipment, personnel services and other services provided at their request. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is recognized during the period in which the corresponding goods and services are consumed once the uncertainty is resolved, which typically occurs when the related costs are incurred for capital upgradeson behalf of a customer. We are capitalizedgenerally considered a principal in such transactions and depreciated overrecord the useful life ofassociated revenue at the asset.gross amount billed to the customer within Operating revenues.
Contract Assets and Liabilities
Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.
Contract liabilities generally represent fees received for mobilization, capital upgrades or capital upgrades.in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the difference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 5 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.
Contract assets and liabilities are presented net on our consolidated balance sheetConsolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in otherOther current assets and accruedAccrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in otherOther assets and otherOther liabilities, respectively, on our consolidated balance sheets.
The following table summarizes our contract assets and contract liabilities (in millions):
| December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||
| Current contract assets | Current contract assets | $ | 1.4 | $ | 3.5 | |||||||||||||||||
| Noncurrent contract assets | Noncurrent contract assets | $ | .4 | $ | 0 | |||||||||||||||||
| Current contract liabilities (deferred revenue) | Current contract liabilities (deferred revenue) | $ | 57.6 | $ | 30.0 | |||||||||||||||||
| Noncurrent contract liabilities (deferred revenue) | Noncurrent contract liabilities (deferred revenue) | $ | 14.3 | $ | 9.7 | |||||||||||||||||
Changes in contract assets and liabilities during the period are as follows (in millions):
| Contract Assets | Contract Liabilities | ||||||||||
| Balance as of January 1, 2020 | $ | 3.5 | $ | 39.7 | |||||||
| Revenue recognized in advance of right to bill customer | 3.1 | — | |||||||||
| Increase due to cash received | — | 81.5 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (24.6) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (24.7) | |||||||||
| Decrease due to transfer to receivables during the period | (4.8) | — | |||||||||
| Balance as of December 31, 2020 | $ | 1.8 | $ | 71.9 | |||||||
| Contract Assets | Contract Liabilities | ||||||||||
| Balance as of December 31, 2021 | $ | 0.3 | $ | 56.6 | |||||||
| Revenue recognized in advance of right to bill customer | 9.2 | — | |||||||||
| Increase due to revenue deferred during the period | — | 156.7 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (41.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (47.1) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (4.2) | (6.1) | |||||||||
| Balance as of December 31, 2022 | 5.3 | 119.0 | |||||||||
| Revenue recognized in advance of right to bill customer | 8.4 | — | |||||||||
| Increase due to revenue deferred during the period | — | 162.9 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (73.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (46.5) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (7.7) | (8.5) | |||||||||
| Balance as of December 31, 2023 | $ | 6.0 | $ | 153.8 | |||||||
Deferred Contract Costs
Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs wereare included in otherOther current assets and otherOther assets on our consolidated balance sheetsConsolidated Balance Sheets and totaled $13.8$85.1 million and $19.7$57.3 million as of December 31, 20202023 and 2019,2022, respectively. Amortization of these costs totaled $42.1 million, $42.1 million and $34.0 million forDuring the years ended December 31, 2020, 20192023 and 2018,2022, and eight months ended December 31, 2021 (Successor), amortization of such costs totaled $92.9 million, $61.7 million and $22.0 million, respectively. During the four months ended April 30, 2021 (Predecessor), amortization of such costs totaled $7.6 million.
Concurrent with our emergence from bankruptcy, we applied fresh start accounting and adjusted the carrying value of our drilling rigs to estimated fair value. See "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. As of December 31, 2023, the carrying value of our property and equipment totaled $1.6 billion, which represented 38% of total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate our estimates, judgments and assumptions relative to the capitalized costs, useful lives and salvage values of our rigs.
We develop and apply property and equipment accounting policies that are designed to appropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
The judgments and assumptions used in determining the next overhaul or the economic lives of the components of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the significant components our rigs, would likely result in materially different asset carrying values and operating results.
The useful lives of our drilling rig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
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Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
Our fleet of 18 floater rigs represented 62% of the gross cost and 63% of the net carrying amount of our depreciable property and equipment as of December 31, 2023. Our fleet of 35 jackup rigs represented 34% of the gross cost and 33% of the net carrying amount of our depreciable property and equipment as of December 31, 2023.
Income Taxes
We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2023, our Consolidated Balance Sheet included a $825.2 million net deferred income tax asset, a $36.6 million liability for income taxes currently payable and a $224.0 million liability for unrecognized tax benefits, inclusive of interest and penalties.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results.
We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we obtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following:
•During recent years, the number of tax jurisdictions in which we conduct operations has increased.
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
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•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2023, included (1) a weighted average discount rate of 4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 5.21% to determine net periodic pension cost and (3) an expected long-term rate of return on pension plan assets of 7.10% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations.
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $60.1 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.88% at December 31, 2023 from 7.10% at December 31, 2022. See "Note 11 - Pension and Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on our pension and other postretirement benefit plans.
NEW ACCOUNTING PRONOUNCEMENTS
See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required under this Item 7A. has been incorporated herein from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
February 22, 2024
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valaris Limited and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for Successor and Predecessor periods, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, on March 3, 2021, the Bankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan for reorganization under Chapter 11, which became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements as of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company evaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted on evaluating the Company’s interpretation of local tax laws and assessment of whether tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
Realizability of certain deferred tax assets
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
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The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2024
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Valaris Limited and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 22, 2024
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value amounts)
| December 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 620.5 | $ | 724.1 | ||||||||||
| Restricted cash | 15.2 | 24.4 | ||||||||||||
| Accounts receivable, net | 459.3 | 449.1 | ||||||||||||
| Other current assets | 177.2 | 148.6 | ||||||||||||
| Total current assets | 1,272.2 | 1,346.2 | ||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1,889.0 | 1,134.5 | ||||||||||||
| Less accumulated depreciation | 255.2 | 157.3 | ||||||||||||
| Property and equipment, net | 1,633.8 | 977.2 | ||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 282.3 | 254.0 | ||||||||||||
| INVESTMENT IN ARO | 124.4 | 111.1 | ||||||||||||
| DEFERRED TAX ASSETS | 855.1 | 55.1 | ||||||||||||
| OTHER ASSETS | 154.4 | 116.7 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Accounts payable - trade | $ | 400.1 | $ | 256.5 | ||||||||||
| Accrued liabilities and other | 344.2 | 247.9 | ||||||||||||
| Total current liabilities | 744.3 | 504.4 | ||||||||||||
| LONG-TERM DEBT | 1,079.3 | 542.4 | ||||||||||||
| DEFERRED TAX LIABILITIES | 29.9 | 16.1 | ||||||||||||
| OTHER LIABILITIES | 471.7 | 499.5 | ||||||||||||
| Total liabilities | 2,325.2 | 1,562.4 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | ||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | 0.8 | 0.8 | ||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | — | — | ||||||||||||
| Stock warrants | 16.4 | 16.4 | ||||||||||||
| Additional paid-in capital | 1,119.8 | 1,097.9 | ||||||||||||
| Retained earnings | 1,025.5 | 160.1 | ||||||||||||
| Accumulated other comprehensive income | 25.2 | 14.7 | ||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | (200.1) | — | ||||||||||||
| Total Valaris shareholders' equity | 1,987.6 | 1,289.9 | ||||||||||||
| NONCONTROLLING INTERESTS | 9.4 | 8.0 | ||||||||||||
| Total equity | 1,997.0 | 1,297.9 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading international and government-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, Africa and Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Chapter 11 Cases
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on and prior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
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Fresh Start Accounting
On the Effective Date, the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. Furthermore, the consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the Chapter 11 Cases and fresh start accounting.
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Valaris Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses are included in Other, net, in our Consolidated Statements of Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in Accumulated other comprehensive income on our Consolidated Balance Sheet. Net foreign currency exchange loss was $3.5 million, and gains were $12.2 million, $8.1 million and $13.4 million, and were included in Other, net, in our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
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Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
There were no short-term investments as of December 31, 2023 and 2022. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our Consolidated Statements of Cash Flows for the year ended December 31, 2022. To mitigate our credit risk, our investments in time deposits have historically been diversified across multiple, high-quality financial institutions.
Property and Equipment
All costs incurred in connection with the acquisition, construction, major enhancement and improvement of assets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Costs incurred to place an asset into service are capitalized, including costs related to the initial mobilization of a newbuild drilling rig. Repair and maintenance costs are charged to contract drilling expense in the period in which they are incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed from the balance sheet, and the resulting gain or loss is included in Other, net in our Consolidated Statements of Operations.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from five to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from 10 to 30 years. Other equipment, including computer and communications hardware and software, is depreciated over estimated useful lives ranging from two to six years.
We evaluate the carrying value of our property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
We recorded pre-tax, non-cash impairment losses related to long-lived assets of $34.5 million and $756.5 million, in the year ended December 31, 2022 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively. See "Note 7 - Property and Equipment" for additional information on our impairment charges.
Operating Revenues and Expenses
See "Note 4 - Revenue from Contracts with Customers" for information on our accounting policies for revenue recognition and certain operating costs that are deferred and amortized over future periods.
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Income Taxes
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in Current income tax expense in our Consolidated Statements of Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries through an intercompany rig sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. The income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Our 2021 Management Incentive Plan (the “MIP”) allows our board of directors to authorize equity-based grants to be settled in cash, shares or a combination of shares and cash. Compensation expense for time-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for performance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
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the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in this estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs, except in the case of objectives based on a market condition, such as our stock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our Consolidated Statements of Operations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 10 - Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement Benefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our Consolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our Consolidated Statements of Operations. All income attributable to noncontrolling interest was from continuing operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to the plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million warrants (the "Warrants") to the former holders of Legacy Valaris' equity to purchase common shares of Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028.
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Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Basic and diluted earnings per share ("EPS") for the Predecessor was calculated in accordance with the two-class method. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excluded non-vested shares.
The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
Anti-dilutive share awards totaling 147,000 and 192,000 were excluded from the computation of diluted EPS for the year ended December 31, 2023 and 2022 (Successor), respectively.
Due to the net loss position, anti-dilutive shares totaling 600,000 and 300,000, for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively, were excluded from the computation of diluted EPS.
We have 5,470,950 Warrants outstanding as of December 31, 2023 which are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant. The exercise of these Warrants into Common Shares would have a dilutive effect to the holdings of Valaris Limited's existing shareholders. These Warrants are anti-dilutive for all periods presented for the Successor.
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes") for which we had the option to settle in cash, shares or a combination thereof for the aggregate amount due upon conversion. On the Effective Date, pursuant to the plan of reorganization, all outstanding obligations under the 2024 Convertible Notes were cancelled and the holders thereunder received the treatment as set forth in the plan of reorganization. However, if the Legacy Valaris average share price had exceeded the exchange price during a respective predecessor reporting period, an assumed number of shares required to settle the conversion obligation in excess of the principal amount would have been included in our denominator for the computation of diluted EPS using the treasury stock method. The Legacy Valaris average share price did not exceed the exchange price during the four months ended April 30, 2021 (Predecessor).
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New Accounting Pronouncements
Recently adopted accounting pronouncements
Business Combinations - In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“Update 2021-08”). ASU No. 2021-08 requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 and provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities for the sale of nonfinancial assets within the scope of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. The FASB issued the update to improve the accounting for acquired revenue contracts with customers in a business combination. Update 2021-08 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. We adopted Update 2021-08 effective January 1, 2023 with no material impact to our financial statements upon adoption.
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The provisions in Update 2020-04 were effective upon issuance and could be applied prospectively to contract modifications made through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022, to December 31, 2024. Our long-term notes receivable from ARO (the "Notes Receivable from ARO"), has generated interest income on a LIBOR-based rate since inception of the note. In 2023, we amended the terms of the Notes Receivable from ARO whereby beginning in 2024, interest income is calculated on a Secured Overnight Financing Rate ("SOFR") based rate. The application of Update 2020-04 and ASU No. 2022-06 on this contract modification and the change in reference rates did not have a material impact on our consolidated financial statements.
Accounting pronouncements to be adopted
Improvements to Reportable Segment Disclosures - In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("Update 2023-07"), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in Update 2023-07 require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
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Improvements to Income Tax Disclosures - In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("Update 2023-09"), which expands income tax disclosure requirements to include additional information related to the rate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in Update 2023-09 also remove disclosures related to certain unrecognized tax benefits and deferred taxes. Update 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied on a prospective basis, with an option to apply the guidance retrospectively. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our consolidated financial statements.
2. CHAPTER 11 PROCEEDINGS
Chapter 11 Cases and Emergence from Chapter 11
On the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors obtained joint administration of the Chapter 11 Cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
On the Effective Date, we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520.0 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and the Common Shares were issued. Also, former holders of Legacy Valaris' equity were issued Warrants to purchase Common Shares.
Below is a summary of the terms of the plan of reorganization:
•Appointed six new members to the Company's board of directors to replace all of the directors of Legacy Valaris, other than the director also serving as President and Chief Executive Officer at the Effective Date, who was re-appointed pursuant to the plan of reorganization. All but one of the seven directors became directors as of the Effective Date and one became a director on July 1, 2021.
•Obligations under Legacy Valaris' outstanding senior notes (the "Senior Notes") were cancelled and the related indentures were cancelled, except to the limited extent expressly set forth in the plan of reorganization and the holders thereunder received the treatment as set forth in the plan of reorganization;
•The Legacy Valaris revolving credit facility (the "Revolving Credit Facility") was terminated and the holders thereunder received the treatment as set forth in the plan of reorganization;
•Holders of the Senior Notes received their pro rata share of (1) 38.48%, or 28.9 million, of Common Shares and (2) approximately 97.6% of the subscription rights to participate in the rights offering (the "Rights Offering") through which the Company offered $550.0 million of the First Lien Notes, which includes the backstop premium;
•Holders of the Senior Notes who participated in the Rights Offering received their pro ratashare of approximately 29.3%, or 22.0 million, of Common Shares, and senior noteholders who agreed to backstop the Rights Offering received their pro rata share of approximately 2.63%, or 2.0 million of Common Shares and approximately $48.8 million in First Lien Notes as a backstop premium;
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•Certain Revolving Credit Facility lenders ("RCF Lenders") who participated in the Rights Offering received their pro rata share of approximately 0.7%, or 0.5 million Common Shares, RCF Lenders who agreed to backstop the Rights Offering received their pro rata share of 0.07%, or 49,500 of Common Shares and approximately $1.2 million in First Lien Notes as a backstop premium;
•Senior noteholders, solely with respect to Pride International LLC's 6.875% senior notes due 2020 and 7.875% senior notes due 2040, Ensco International 7.20% Debentures due 2027, and the 4.875% senior notes due 2022, 4.75% senior notes due 2024, 7.375% senior notes due 2025, 5.4% senior notes due 2042 and 5.85% senior notes due 2044, received an aggregate cash payment of $26.0 million in connection with settlement of certain alleged claims against the Company;
•The two RCF Lenders who chose to participate in the Rights Offering received their pro rata share of (1) 5.3%, or 4.0 million Common Shares (2) approximately 2.427% of the First Lien Notes (and associated Common Shares), (3) $7.8 million in cash, and (4) their pro rata share of the backstop premium. The RCF Lenders who entered into the amended restructuring support agreement and elected not to participate in the Rights Offering received their pro rata share of (1) 22.980%, or 17.2 million of Common Shares and (2) $96.1 million in cash;
•Holders of general unsecured claims are entitled to receive payment in full within ninety days after the later of (a) the Effective Date and (b) the date such claim comes due;
•0.4 million Common Shares were issued and $5.0 million was paid to Daewoo Shipbuilding & Marine Engineering Co., Ltd (the "Shipyard");
•Legacy Valaris Class A ordinary shares were cancelled and holders received 5.6 million in Warrants exercisable for one Common Share per Warrant at initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028;
•All equity-based awards of Legacy Valaris that were outstanding were cancelled;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received Common Shares;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received First Lien Notes; and
•There were no borrowings outstanding against our debtor-in-possession ("DIP") facility and there were no DIP claims that were not due and payable on, or that otherwise survived, the Effective Date. The DIP Credit Agreement terminated on the Effective Date.
Management Incentive Plan
In accordance with the plan of reorganization, Valaris Limited adopted the 2021 Management Incentive Plan (the “MIP”) as of the Effective Date and authorized and reserved 9.0 million Common Shares for issuance pursuant to equity incentive awards to be granted under the MIP, which may be in the form of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and cash awards or any combination thereof. See "Note 10 - Share Based Compensation" for more information on awards granted under the MIP after the Effective date.
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Liabilities Subject to Compromise
Prior to the Effective Date, liabilities subject to compromise were comprised primarily of the aggregate balance of our pre-petition Senior Notes of $6.5 billion, amounts drawn under the Revolving Credit Facility as of the Petition Date of $581.0 million and the corresponding unpaid accrued interest as of the Petition Date of $203.5 million.
The contractual interest expense on the outstanding Senior Notes and the Revolving Credit Facility was in excess of recorded interest expense by $132.9 million for the four months ended April 30, 2021 (Predecessor). This excess contractual interest was not included as interest expense on our Consolidated Statements of Operations as we had discontinued accruing interest on the Predecessor's Senior Notes and Revolving Credit Facility subsequent to the Petition Date. The Predecessor discontinued making interest payments on the Senior Notes beginning in June 2020.
Reorganization Items
Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our Consolidated Statements of Operations for the year ended December 31, 2022, eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor). These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases and the effects of the emergence from bankruptcy, including the application of fresh start accounting.
The components of reorganization items, net were as follows (in millions):
| Successor | Predecessor | ||||||||||||||||||||||
| Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||
| Professional fees | $ | 2.4 | $ | 17.2 | $ | 93.4 | |||||||||||||||||
| Contract items | — | (1.7) | 3.9 | ||||||||||||||||||||
| Reorganization items (fees) | 2.4 | 15.5 | 97.3 | ||||||||||||||||||||
| Contract items | — | — | 0.5 | ||||||||||||||||||||
| Backstop premium | — | — | 30.0 | ||||||||||||||||||||
| Gain on settlement of liabilities subject to compromise | — | — | (6,139.0) | ||||||||||||||||||||
| Issuance of Common Shares for backstop premium | — | — | 29.1 | ||||||||||||||||||||
| Issuance of Common Shares to the Shipyard | — | — | 5.4 | ||||||||||||||||||||
| Write-off of unrecognized share-based compensation expense | — | — | 16.0 | ||||||||||||||||||||
| Impact of newbuild contract amendments | — | — | 350.7 | ||||||||||||||||||||
| Loss on fresh start adjustments | — | — | 9,194.6 | ||||||||||||||||||||
| Reorganization items (non-cash) | — | — | 3,487.3 | ||||||||||||||||||||
| Total reorganization items, net | $ | 2.4 | $ | 15.5 | $ | 3,584.6 | |||||||||||||||||
| Reorganization items (fees) paid | $ | 2.4 | $ | 14.7 | $ | 59.0 | |||||||||||||||||
| Reorganization items (fees) unpaid | $ | — | $ | 0.8 | $ | 38.3 | |||||||||||||||||
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3. FRESH START ACCOUNTING
Applicability of Fresh Start Accounting
Upon emergence from bankruptcy, we qualified for and applied fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes because (1) the holders of the then existing Class A ordinary shares of the Predecessor received less than 50 percent of the Common Shares of the Successor outstanding upon emergence and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the total of all post-petition liabilities and allowed claims.
The reorganization value derived from the range of enterprise values associated with the plan of reorganization was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes). The amount of deferred income taxes recorded was determined in accordance with the applicable income tax accounting standard. The April 30, 2021 fair values of the Company’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets.
Reorganization Value
The reorganization value represents the fair value of the Successor's total assets and was derived from the enterprise value associated with the plan of reorganization, which represents the estimated fair value of an entity's long-term debt and equity less unrestricted cash upon emergence from chapter 11. As set forth in the disclosure statement and approved by the Bankruptcy Court, third-party valuation advisors estimated the enterprise value to be between $1,860.0 million and $3,145.0 million. The enterprise value range of the reorganized Debtors was determined primarily by using a discounted cash flow analysis. The value agreed in the plan of reorganization is indicative of an enterprise value at the low end of this range, or $1,860.0 million.
The following table reconciles the enterprise value to the estimated fair value of Successor Common Shares as of the Effective Date (in millions, except per share value):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Less: Fair value of debt | (544.8) | ||||
| Less: Warrants | (16.4) | ||||
| Less: Noncontrolling interest | 1.1 | ||||
| Less: Pension and other post-retirement benefits liabilities | (189.0) | ||||
| Less: Adjustments not contemplated in Enterprise Value | (639.0) | ||||
| Fair value of Successor Common Shares | $ | 1,079.5 | |||
| Shares issued upon emergence | 75.0 | ||||
| Per share value | $ | 14.39 | |||
The following table reconciles the enterprise value to the reorganization value as of the Effective Date (in millions):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Plus: Non-interest bearing current liabilities | 346.0 | ||||
| Less: Adjustments not contemplated in Enterprise Value | (218.0) | ||||
| Reorganization value of Successor assets | $ | 2,595.6 | |||
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Adjustments not contemplated in Enterprise Value represent certain obligations of the Successor that were either not contemplated or contemplated in a different amount in the forecasted cash flows of the enterprise valuation performed by third-party valuation advisors that, had they incorporated those anticipated cash flows into their analysis, the resulting valuation would have been different. For the reconciliation of Reorganization value of Successor assets, this item includes certain tax balances, contract liabilities, as well as an adjustment for the fair value of pension obligations. The reconciliation to Successor Common Share value includes these same reconciling items as well as other current and non-current liabilities of the Successor at the emergence.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in the valuation utilizing assumptions regarding future day rates, utilization, operating costs and capital requirements as of the emergence date. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
Valuation Process
The fair values of the Company's principal assets and liabilities including property, plant and equipment as well as our 50% equity interest in ARO and our Notes Receivable from ARO, options to purchase VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships"), the First Lien Notes, pensions and Warrants were estimated with the assistance of third-party valuation advisors.
Property, Plant and Equipment
The valuation of the Company’s drilling rigs was estimated by using an income approach or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs, reactivation costs and capital requirements. In developing these assumptions, forecasted day rates and utilization took into account current market conditions and our anticipated business outlook. The cash flows were discounted at our weighted average cost of capital, which was derived from a blend of our after-tax cost of debt and our cost of equity and computed using public share price information for similar offshore drilling market participants, certain U.S. Treasury rates and certain risk premiums specific to the Company.
Our remaining property and equipment, including owned real estate and other equipment, was valued using a cost approach, in which the estimated replacement cost of the assets was adjusted for physical depreciation and obsolescence, where applicable, to arrive at estimated fair value.
The estimated fair value of our property and equipment includes an adjustment to reconcile to our reorganization value.
Notes Receivable from ARO
The fair value of the Notes Receivable from ARO was estimated using an income approach to value the forecasted cash flows attributed to the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium.
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Investment in ARO
We estimated the fair value of the equity investment in ARO primarily by applying an income approach, using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate.
Options to Purchase Newbuild Drillships
The fair value of the options to purchase Newbuild Drillships was estimated using an option pricing model utilizing the estimated fair value of a newbuild rig, estimated purchase price upon exercise of the options, the holding period, equity volatility and the risk-free rate.
First Lien Notes
The fair value of the First Lien Notes was determined to approximate the par value based on third-party valuation advisors’ analysis of the Company’s collateral coverage, financial metrics, and interest rate for the First Lien Notes relative to market rates of recent placements of a similar term for industry participants with similar credit risk.
Pensions
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Upon emergence, our pension and other postretirement plans were remeasured as of the Effective Date. Key assumptions at the Effective Date included (1) a weighted average discount rate of 2.81% to determine pension benefit obligations and (2) an expected long-term rate of return on pension plan assets of 6.03% to determine net periodic pension cost.
Warrants
The fair value of the Warrants was determined using an option pricing model considering the contractual terms of the Warrant issuance. The key market data assumptions for the option pricing model are the estimated volatility and the risk-free rate. The volatility assumption was estimated using market data for offshore drilling market participants with consideration for differences in leverage. The risk-free rate assumption was based on U.S. Treasury Constant Maturity rates with a comparable term.
Condensed Consolidated Balance Sheet
The adjustments included in the following Condensed Consolidated Balance Sheet reflect the effects of the transactions contemplated by the plan of reorganization and executed by the Company on the Effective Date (reflected in the column “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded.
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| As of April 30, 2021 | |||||||||||||||||||||||
| Predecessor | Reorganization Adjustments | Fresh Start Accounting Adjustments | Successor | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 280.2 | $ | 327.4 | (a) | $ | — | $ | 607.6 | ||||||||||||||
| Restricted cash | 45.7 | 42.7 | (b) | — | 88.4 | ||||||||||||||||||
| Accounts receivable, net | 425.9 | — | — | 425.9 | |||||||||||||||||||
| Other current assets | 370.1 | 1.5 | (c) | (281.1) | (o) | 90.5 | |||||||||||||||||
| Total current assets | 1,121.9 | 371.6 | (281.1) | 1,212.4 | |||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET | 10,026.4 | (417.6) | (d) | (8,699.7) | (p) | 909.1 | |||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | — | (214.4) | (q) | 228.3 | ||||||||||||||||||
| INVESTMENT IN ARO | 123.9 | — | (43.4) | (r) | 80.5 | ||||||||||||||||||
| OTHER ASSETS | 166.4 | (10.0) | (e) | 8.9 | (s) | 165.3 | |||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
| Accounts payable - trade | $ | 161.5 | $ | 13.1 | (f) | $ | (0.5) | (t) | $ | 174.1 | |||||||||||||
| Accrued liabilities and other | 290.7 | (12.4) | (g) | (61.8) | (u) | 216.5 | |||||||||||||||||
| Total current liabilities | 452.2 | 0.7 | (62.3) | 390.6 | |||||||||||||||||||
| LONG-TERM DEBT | — | 544.8 | (h) | — | 544.8 | ||||||||||||||||||
| OTHER LIABILITIES | 706.2 | (55.2) | (i) | (85.6) | (v) | 565.4 | |||||||||||||||||
| Total liabilities not subject to compromise | 1,158.4 | 490.3 | (147.9) | 1,500.8 | |||||||||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | (7,313.7) | (j) | — | — | ||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| Predecessor Class A ordinary shares | 82.5 | (82.5) | (k) | — | — | ||||||||||||||||||
| Predecessor Class B ordinary shares | 0.1 | (0.1) | (k) | — | — | ||||||||||||||||||
| Successor common shares | — | 0.8 | (l) | — | 0.8 | ||||||||||||||||||
| Successor stock warrants | — | 16.4 | (m) | — | 16.4 | ||||||||||||||||||
| Predecessor additional paid-in capital | 8,644.0 | (8,644.0) | (k) | — | — | ||||||||||||||||||
| Successor additional paid-in capital | — | 1,078.7 | (l) | — | 1,078.7 | ||||||||||||||||||
| Retained deficit | (5,147.4) | 14,322.6 | (n) | (9,175.2) | (w) | — | |||||||||||||||||
| Accumulated other comprehensive loss | (93.4) | — | 93.4 | (x) | — | ||||||||||||||||||
| Predecessor treasury shares | (75.5) | 75.5 | (k) | — | — | ||||||||||||||||||
| Total Valaris shareholders' equity | 3,410.3 | 6,767.4 | (9,081.8) | 1,095.9 | |||||||||||||||||||
| NONCONTROLLING INTERESTS | (1.1) | — | — | (1.1) | |||||||||||||||||||
| Total equity | 3,409.2 | 6,767.4 | (9,081.8) | 1,094.8 | |||||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
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Reorganization Adjustments
(a) Cash
Represents the reorganization adjustments (in millions):
| Receipt of cash for First Lien Notes | $ | 500.0 | |||
| Loan proceeds from backstop lenders | 20.0 | ||||
| Funds received for liquidation of rabbi trust related to certain employee benefits | 17.6 | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Transfer of funds for payment of certain professional fees to escrow account | (42.7) | ||||
| Payment for certain professional services fees | (29.0) | ||||
| Various other | (8.6) | ||||
| $ | 327.4 | ||||
(b) Restricted cash
Reflects the reorganization adjustment to record the transfer of cash for payment of certain professional fees to restricted cash, which were held in escrow until billings from professionals were received and reconciled at which time the funds in the account were released.
(c) Other current asset
Reflects certain prepayments incurred upon emergence.
(d) Property and Equipment, net
Reflects the reorganization adjustment to remove $417.6 million of work-in-process related to the Newbuild Drillships. These values were removed from property and equipment, net, based on the terms of the amended agreements with the Shipyard. As a result of the option to take delivery, we removed the historical work-in-process balances from the balance sheet.
(e) Other assets
Represents the reorganization adjustments (in millions):
| Liquidation of rabbi trust related to certain employee benefits | $ | (17.6) | |||
| Elimination of right-of-use asset associated with Newbuild Drillships | (5.5) | ||||
| Fair value of options to purchase Newbuild Drillships | 13.1 | ||||
| $ | (10.0) | ||||
Our supplemental executive retirement plans are non-qualified plans that provided eligible employees an opportunity to defer a portion of their compensation for use after retirement. The plans were frozen to the entry of new participants in 2019 and to future compensation deferrals as of January 1, 2020. Upon emergence, assets previously held in a rabbi trust maintained for the plan were liquidated and the plan was amended.
In accordance with the amended agreement with the Shipyard, our leases were terminated and we have eliminated the historical right-of-use asset associated with the berthing locations of Newbuild Drillships.
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Additionally, upon effectiveness of the plan of reorganization, the amended agreement with the Shipyard provides the Company with the option to purchase the Newbuild Drillships. The reorganization adjustments include an asset that reflects the fair value of the option to purchase the Newbuild Drillships and embedded feature related to the ability, under the amended agreements with the Shipyard, for the equity issued pursuant to this arrangement to be put to the Company for $8.0 million of consideration for each rig, should we choose to take delivery.
(f) Accounts payable - trade
Reflects the following reorganization adjustments (in millions):
| Professional fees incurred upon emergence | $ | 26.1 | |||
| Payment of professional fees incurred prior to emergence | (12.6) | ||||
| Payment of certain accounts payable incurred prior to emergence | (0.4) | ||||
| $ | 13.1 | ||||
(g) Accrued liabilities and other
Reflects the following reorganization adjustments (in millions):
| Elimination of lease liabilities associated with Newbuild Drillships | $ | (5.0) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.1) | ||||
| Payment of certain accrued liabilities incurred prior to emergence | (3.3) | ||||
| $ | (12.4) | ||||
In accordance with the amended agreement with the Shipyard, our leases were terminated and we eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships. Accrued post-petition holding costs were also eliminated as a result of the amendments made effective upon emergence. Additionally, reorganization adjustments to accrued liabilities and other includes an amount primarily related to payment of professional fees incurred prior to emergence.
(h) Long-term debt
Reflects the reorganization adjustment to record the issuance of the $550.0 million aggregate principal amount of First Lien Notes and debt issuance costs of $5.2 million.
(i) Other liabilities
Reflects the following reorganization adjustments (in millions):
| Elimination of construction contract intangible liabilities associated with Newbuild Drillships | $ | (49.9) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.7) | ||||
| Elimination of lease liabilities associated with Newbuild Drillships | (0.6) | ||||
| $ | (55.2) | ||||
The reorganization adjustments to other liabilities primarily relate to the elimination of construction contract intangible liabilities associated with the Newbuild Drillships. These construction contract intangible liabilities were recorded in purchase accounting for the original contracting entity. As the amended contract was structured as an option whereby we had the right, not the obligation to take delivery of the rigs, there was no longer an intangible liability associated with the contracts.
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We have eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships and accrued post-petition holding costs as described in (g) above.
(j) Liabilities subject to compromise
Reflects the following reorganization adjustments (in millions):
| Settlement of liabilities subject to compromise | $ | 7,313.7 | |||
| Issuance of common stock to Predecessor creditors | (721.0) | ||||
| Issuance of common stock to backstop parties | (323.8) | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Gain on settlement of liabilities subject to compromise | $ | 6,139.0 | |||
(k) Predecessor ordinary shares, additional paid-in capital and treasury shares
Represents the cancellation of the Predecessor's ordinary shares of $82.6 million, additional paid-in capital of $8,644.0 million and treasury stock of $75.5 million.
(l) Successor common shares and additional paid-in capital
Represents par value of 75.0 million new Common Shares of $0.8 million and capital in excess of par value of $1,078.7 million.
(m) Successor stock warrants
On the Effective Date and pursuant to the plan of reorganization, Valaris Limited issued an aggregate of 5.6 million Warrants exercisable for up to an aggregate of 5.6 million Common Shares to former holders of Legacy Valaris' equity interests. The fair value of the Warrants as of the Effective Date was $16.4 million.
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(n) Retained deficit
Represents the reorganization adjustments to total equity as follows (in millions):
| Gain on settlement of liabilities subject to compromise | $ | (6,139.0) | |||
| Issuance of Common Shares for backstop premium | 29.1 | ||||
| Issuance of Common Shares to the Shipyard | 5.4 | ||||
| Write-off of unrecognized share-based compensation expense | 16.0 | ||||
| Professional fees and success fees | 35.9 | ||||
| Backstop premium | 30.0 | ||||
| Impact of newbuild contract amendments | 350.7 | ||||
| Reorganization items, net | (5,671.9) | ||||
| Cancellation of Predecessor common shares | (82.6) | ||||
| Cancellation of Predecessor treasury shares | 75.5 | ||||
| Cancellation of Predecessor additional paid in capital | (7,856.4) | ||||
| Cancellation of equity component of Predecessor convertible notes | (220.0) | ||||
| Cancellation of Predecessor cash and equity compensation plans | (583.6) | ||||
| Fair value of Warrants | 16.4 | ||||
| $ | (14,322.6) | ||||
Fresh Start Adjustments
(o) Other current assets
Reflects the fresh start adjustments to record the estimated fair value of other current assets as follows (in millions):
| Elimination of materials and supplies | $ | (260.8) | |||
| Elimination of historical deferred contract drilling expenses | (20.3) | ||||
| $ | (281.1) | ||||
Primarily reflects the fresh start adjustment to eliminate the historical balance for materials and supplies as the result of a change in accounting policies upon emergence. Historically, we recognized materials and supplies on the balance sheet when purchased and subsequently expensed items when consumed. Upon emergence from bankruptcy, we elected to change our accounting policies related to materials and supplies whereby materials and supplies will be expensed as a period cost when received. Additionally, a customer arrangement provides that we take title to their materials and supplies for the duration of the contract and return or pay cash for them at the termination of the contract. Together with our policy change on materials and supplies, we elected to record these assets and the obligation to our customer on a net basis as opposed to a gross basis.
The fresh start adjustment for the elimination of historical deferred contract drilling expenses primarily relates to deferred mobilization costs, deferred contract preparation costs and deferred certification costs. Costs incurred for mobilization and contract preparation prior to the commencement of drilling services are deferred and subsequently amortized over the term of the related drilling contract. Additionally, we must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. Deferred regulatory certificationThese deferred costs had no future economic benefit and compliance costs were included in other current assets and other assets on our consolidated balance sheets and totaled $8.4 million and $10.8 million as of December 31, 2020 and 2019, respectively. Amortization of these costs totaled $8.9 million, $10.3 million and $12.4 million foreliminated from the years ended December 31, 2020, 2019 and 2018, respectively.fresh start financial statements.
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Furthermore, upon emergence from bankruptcy, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on a straight-line basis over the contract termexpected time until the next required overhaul or corresponding certification period to operating revenues and contract drilling expense, respectively, with the exception of the contract liabilities related to our Lease Agreements with ARO which would not be contractually payable until the end of the lease term or termination, if sooner. Expected future amortizationexpected economic lives of the components. Prior to emergence, we recorded our contract liabilities and deferred costs recordeddrilling rigs as a single asset with a useful life ascribed by the expected useful life of December 31, 2020 is set forththat asset.
(q) Notes Receivable from ARO
Reflects the fresh start adjustment to record the estimated fair value of the Notes Receivable from ARO.
(r) Investment in ARO
Reflects the table belowfresh start adjustment to record the estimated fair value of the equity investment in ARO.
(s) Other assets
Reflects the fresh start adjustments to record the estimated fair value of other assets as follows (in millions):
| 2021 | 2022 | 2023 | 2024 & Thereafter | Total | |||||||||||||||||||||||||
| Amortization of contract liabilities | $ | 57.6 | $ | 14.3 | $ | 0 | $ | 0 | $ | 71.9 | |||||||||||||||||||
| Amortization of deferred costs | $ | 17.4 | $ | 4.3 | $ | .5 | $ | 0 | $ | 22.2 | |||||||||||||||||||
| Deferred tax impacts of certain fresh start adjustments | $ | 21.1 | |||
| Fair value of contracts with customers | 8.5 | ||||
| Fair value adjustments to right-of-use assets | 0.4 | ||||
| Elimination of historical deferred contract drilling expenses | (16.5) | ||||
| Elimination of other deferred costs | (4.6) | ||||
| $ | 8.9 | ||||
| Amounts Recognized as of Transaction Date | Measurement Period Adjustments (1) | Estimated Fair Value | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 931.9 | $ | 0 | $ | 931.9 | |||||||||||
Accounts receivable(2) | 207.1 | (6.9) | 200.2 | ||||||||||||||
| Other current assets | 101.6 | (2.6) | 99.0 | ||||||||||||||
| Long-term notes receivable from ARO | 454.5 | 0 | 454.5 | ||||||||||||||
| Investment in ARO | 138.8 | 2.5 | 141.3 | ||||||||||||||
| Property and equipment | 2,989.8 | (26.0) | 2,963.8 | ||||||||||||||
| Other assets | 41.7 | 1.1 | 42.8 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Accounts payable and accrued liabilities | 259.4 | 15.7 | 275.1 | ||||||||||||||
| Current portion of long-term debt | 203.2 | 0 | 203.2 | ||||||||||||||
| Long-term debt | 1,910.9 | 0 | 1,910.9 | ||||||||||||||
| Other liabilities | 376.3 | 34.5 | 410.8 | ||||||||||||||
| Net assets acquired | 2,115.6 | (82.1) | 2,033.5 | ||||||||||||||
| Less: Merger consideration | (1,402.8) | 0 | (1,402.8) | ||||||||||||||
| Bargain purchase gain | $ | 712.8 | $ | (82.1) | $ | 630.7 | |||||||||||
The equity method investment in ARO was recorded at itsfresh start adjustment to record the estimated fair value of contracts with customers represents the intangible assets recognized for firm customer contracts in place at the Effective Date that have favorable contract terms as of the Transaction Date. See "Note 5compared to current market day rates for comparable drilling rigs. - Equity Method InvestmentThe various factors considered in ARO"the adjustment were (1) the contracted day rate for additional informationeach contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the emergence date. The intangible assets are computed based on ARO. We estimated the fairpresent value of the equity investment primarily by applyingdifference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an income approach,estimated current market day rate using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to right-of-use assets reflects the remeasuring of our operating leases as of the emergence date. Certain operating leases had unfavorable terms as of the emergence date, and as a result the right-of-use asset for such leases did not equal the lease liability upon emergence.
The fresh start adjustment to eliminate historical deferred contract drilling expenses reflects the noncurrent portion of historical deferred contract drilling expenses described in (o) above as well as the elimination of customer contract intangibles previously recorded in purchase accounting for a 2019 transaction.
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The fresh start adjustments to eliminate other deferred costs reflect non-operational deferred costs that had no future economic benefit.
(t) Accounts payable - trade
The fresh start adjustment to accounts payable trade reflects the write off of certain deferred amounts related to our operating leases. This value was eliminated through the remeasurement of our leases as of the emergence date.
(u) Accrued liabilities and other
Reflects the fresh start adjustments to record the estimated fair value of current liabilities as follows (in millions):
| Elimination of customer payable balance | $ | (36.8) | |||
| Elimination of historical deferred revenues | (25.9) | ||||
| Fair value of contracts with customers | 0.5 | ||||
| Fair value adjustment to lease liabilities | 0.4 | ||||
| $ | (61.8) | ||||
The fresh start adjustment to eliminate the customer payable balance is related to the change in accounting policy to present the balance on a net basis.
The fresh start adjustment to eliminate historical deferred revenues is primarily related to amounts previously received for the reimbursement for capital upgrades, upfront contract deferral fees and mobilization. Such amounts are deferred and subsequently amortized over the term of the related drilling contract. The deferred revenue did not represent any future performance obligations and was therefore eliminated as a fresh start accounting adjustment.
The fresh start adjustment to record the estimated fair value of contracts with customers reflects the intangible liabilities recognized for firm customer contracts in place at the Effective Date that have unfavorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the adjustment and computation of the intangible liabilities are described in (s) above. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(v) Other liabilities
Reflects the fresh start adjustments to record the estimated fair value of other liabilities as follows (in millions):
| Adjustment to fair value of pension and other post-retirement plan liabilities | $ | (82.7) | |||
| Elimination of historical deferred revenue | (5.9) | ||||
| Deferred tax impacts of certain fresh start adjustments | 1.7 | ||||
| Fair value adjustments to lease liabilities | 1.1 | ||||
| Fair value adjustments to other liabilities | 0.2 | ||||
| $ | (85.6) | ||||
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The fresh start adjustment to fair value pension and other post-retirement plan liabilities results from the remeasurement of the pension and other post-retirement benefit plans at the emergence date.
The fresh start adjustment to eliminate deferred revenues reflects the noncurrent portion of deferred revenues described in (u) above.
The fresh start adjustment for deferred income tax liabilities represents the estimated incremental deferred taxes, which reflects the tax effect of the differences between the estimated fair value certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(w) Retained Deficit
Reflects the fresh start adjustments to retained deficit as follows (in millions):
| Fair value adjustments to prepaid and other current assets | $ | (281.1) | |||
| Fair value adjustments to property | (8,699.7) | ||||
| Fair value of intangible assets | 8.5 | ||||
| Fair value adjustment to investment in ARO | (43.4) | ||||
| Fair value adjustment to note receivable from ARO | (214.4) | ||||
| Fair value adjustments to other assets | (20.7) | ||||
| Fair value adjustments to other current liability | 62.8 | ||||
| Fair value of intangible liabilities | (0.5) | ||||
| Fair value adjustment to other liabilities | 87.3 | ||||
| Elimination of Predecessor accumulated other comprehensive loss | (93.4) | ||||
| Total fresh start adjustments included in reorganization items, net | $ | (9,194.6) | |||
| Tax impact of fresh start adjustments | 19.4 | ||||
| $ | (9,175.2) | ||||
(x) Accumulated other comprehensive loss
Reflects the fresh start adjustments for the elimination of Predecessor accumulated other comprehensive loss through Reorganization items, net.
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Under our drilling contracts with customers, we provide a drilling rig and drilling services, including rig crews, on a day rate basis. We receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.
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Our drilling contracts contain a lease component and we have elected to apply the practical expedient provided under Accounting Standards Codification ("ASC") 842 to not separate the lease and non-lease components and apply the revenue recognition guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.
The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of December 31, 2023 was between approximately 1 month and 5 years.
Day Rate Drilling Revenue
Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices are typically 30 days.
Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
Contract Termination - VALARIS DS-11
In 2021, a contract was awarded to VALARIS DS-11 for a project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract. As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Consolidated Statements of Operations for the year ended December 31, 2022 (Successor).
Mobilization / Demobilization Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in Operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in Contract drilling expense.
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Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
Capital Upgrade / Contract Preparation Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation generally for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and other contract preparation work are recorded as a contract liability and amortized on a straight-line basis over the contract term to Operating revenues.
Revenues Related to Reimbursable Expenses
We generally receive reimbursements from our customers for purchases of supplies, equipment, personnel services and other services provided at their request. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is recognized during the period in which the corresponding goods and services are consumed once the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer within Operating revenues.
Contract Assets and Liabilities
Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.
Contract liabilities generally represent fees received for mobilization, capital upgrades or in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the difference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 5 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.
Contract assets and liabilities are presented net on our Consolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in Other current assets and Accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in Other assets and Other liabilities, respectively, on our Consolidated Balance Sheets.
The following table summarizes our contract assets and contract liabilities (in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Current contract assets | $ | 1.5 | $ | 4.6 | |||||||
| Noncurrent contract assets | $ | 4.5 | $ | 0.7 | |||||||
| Current contract liabilities (deferred revenue) | $ | 116.2 | $ | 78.0 | |||||||
| Noncurrent contract liabilities (deferred revenue) | $ | 37.6 | $ | 41.0 | |||||||
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Changes in contract assets and liabilities during the period are as follows (in millions):
| Contract Assets | Contract Liabilities | ||||||||||
| Balance as of December 31, 2021 | $ | 0.3 | $ | 56.6 | |||||||
| Revenue recognized in advance of right to bill customer | 9.2 | — | |||||||||
| Increase due to revenue deferred during the period | — | 156.7 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (41.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (47.1) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (4.2) | (6.1) | |||||||||
| Balance as of December 31, 2022 | 5.3 | 119.0 | |||||||||
| Revenue recognized in advance of right to bill customer | 8.4 | — | |||||||||
| Increase due to revenue deferred during the period | — | 162.9 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (73.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (46.5) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (7.7) | (8.5) | |||||||||
| Balance as of December 31, 2023 | $ | 6.0 | $ | 153.8 | |||||||
Deferred Contract Costs
Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs are included in Other current assets and Other assets on our Consolidated Balance Sheets and totaled $85.1 million and $57.3 million as of December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor), amortization of such costs totaled $92.9 million, $61.7 million and $22.0 million, respectively. During the four months ended April 30, 2021 (Predecessor), amortization of such costs totaled $7.6 million.
Property and Equipment
value. See "
We develop and apply property and equipment accounting policies that are designed to revenueappropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of $2.0 million in 2021.our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives.
The Rowan Transaction was executed throughjudgments and assumptions used in determining the acquisition of Rowan's outstanding ordinary shares and, therefore,next overhaul or the historical tax baseseconomic lives of the acquired assetscomponents of our property and liabilities, net operating lossesequipment reflect both historical experience and other tax attributesexpectations regarding future operations, utilization and performance of Rowan, were acquired asour assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the Transaction Date. However, adjustments were recorded to recognize deferred tax assets and liabilities for the tax effects of differences between acquisition date fairsignificant components our rigs, would likely result in materially different asset carrying values and tax bases of assets acquired and liabilities assumed. Additionally, the interactionoperating results.
The useful lives of our drilling rig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and Rowan's tax attributes that impactednatural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
Income Taxes
We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2023, our Consolidated Balance Sheet included a $825.2 million net deferred income tax asset, a $36.6 million liability for income taxes currently payable and a $224.0 million liability for unrecognized tax benefits, inclusive of interest and penalties.
The carrying values of deferred income tax assets and liabilities recognizedreflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the Rowan Transaction were measured at rates enacted asdeployment of the Transaction Date. Tax rate changes, or any deferred tax adjustments for newplanning strategies, may result in materially different carrying values of income tax legislation, following the Transaction Date will be reflected in ourassets and liabilities and operating results in the period in which the change in tax laws or rate is enacted.results.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized nettax assets and liabilities for uncertainas a result of finalizing tax positions totaling $50.4 million.returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following:
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
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•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities issued aggregatechange frequently, requiring us to modify existing tax assessments totalingstrategies to conform to such changes.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2023, included (1) a weighted average discount rate of 4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 5.21% to determine net periodic pension cost and (3) an expected long-term rate of return on pension plan assets of 7.10% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations.
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately €142.0$60.1 million, (approximately $173.5 million converted usingwhile a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current period-end exchange rate) related to tax years 2014, 2015level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes, and 2016the expectations for severalfuture returns of Rowan's Luxembourg subsidiaries. As a result of our review and analysis of facts and circumstances that existed at the Transaction Date, we recognized liabilities related to the Luxembourg tax assessments totaling €93.0 million (approximately $113.6 million converted usingeach asset class. The expected return for each asset class was then weighted based upon the current period-end exchange rates).asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.88% at December 31, 2023 from 7.10% at December 31, 2022. See "Note 1311 - Income Taxes"Pension and Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for further information on this matter.our pension and other postretirement benefit plans.
NEW ACCOUNTING PRONOUNCEMENTS
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required under this Item 7A. has been incorporated herein from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
February 22, 2024
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valaris Limited and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for Successor and Predecessor periods, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, on March 3, 2021, the Bankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan for reorganization under Chapter 11, which became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements as of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company evaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted on evaluating the Company’s interpretation of local tax laws and assessment of whether tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
Realizability of certain deferred tax assets
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
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The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2024
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Valaris Limited and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 22, 2024
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value amounts)
| December 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 620.5 | $ | 724.1 | ||||||||||
| Restricted cash | 15.2 | 24.4 | ||||||||||||
| Accounts receivable, net | 459.3 | 449.1 | ||||||||||||
| Other current assets | 177.2 | 148.6 | ||||||||||||
| Total current assets | 1,272.2 | 1,346.2 | ||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1,889.0 | 1,134.5 | ||||||||||||
| Less accumulated depreciation | 255.2 | 157.3 | ||||||||||||
| Property and equipment, net | 1,633.8 | 977.2 | ||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 282.3 | 254.0 | ||||||||||||
| INVESTMENT IN ARO | 124.4 | 111.1 | ||||||||||||
| DEFERRED TAX ASSETS | 855.1 | 55.1 | ||||||||||||
| OTHER ASSETS | 154.4 | 116.7 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Accounts payable - trade | $ | 400.1 | $ | 256.5 | ||||||||||
| Accrued liabilities and other | 344.2 | 247.9 | ||||||||||||
| Total current liabilities | 744.3 | 504.4 | ||||||||||||
| LONG-TERM DEBT | 1,079.3 | 542.4 | ||||||||||||
| DEFERRED TAX LIABILITIES | 29.9 | 16.1 | ||||||||||||
| OTHER LIABILITIES | 471.7 | 499.5 | ||||||||||||
| Total liabilities | 2,325.2 | 1,562.4 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | ||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | 0.8 | 0.8 | ||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | — | — | ||||||||||||
| Stock warrants | 16.4 | 16.4 | ||||||||||||
| Additional paid-in capital | 1,119.8 | 1,097.9 | ||||||||||||
| Retained earnings | 1,025.5 | 160.1 | ||||||||||||
| Accumulated other comprehensive income | 25.2 | 14.7 | ||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | (200.1) | — | ||||||||||||
| Total Valaris shareholders' equity | 1,987.6 | 1,289.9 | ||||||||||||
| NONCONTROLLING INTERESTS | 9.4 | 8.0 | ||||||||||||
| Total equity | 1,997.0 | 1,297.9 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading international and government-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, Africa and Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs were expensedof constructing the well and supporting drilling operations as incurredwell as the economic risk relative to the success of the well.
Chapter 11 Cases
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and consistedcertain of various advisory, legal, accounting, valuationits direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on and prior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other professionalassets, of Legacy Valaris.
References to the financial position and results of operations of the "Successor" or consulting fees totaling $18.0"Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
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Fresh Start Accounting
On the Effective Date, the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. Furthermore, the consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the Chapter 11 Cases and fresh start accounting.
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Valaris Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses are included in Other, net, in our Consolidated Statements of Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in Accumulated other comprehensive income on our Consolidated Balance Sheet. Net foreign currency exchange loss was $3.5 million, and gains were $12.2 million, $8.1 million and $13.4 million, and were included in Other, net, in our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
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Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
There were no short-term investments as of December 31, 2023 and 2022. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our Consolidated Statements of Cash Flows for the year ended December 31, 2019. These costs were included2022. To mitigate our credit risk, our investments in generaltime deposits have historically been diversified across multiple, high-quality financial institutions.
Property and administrative expense in our consolidated statement of operations.Equipment
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from five to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from 10 to 30 years. Other equipment, including computer and communications hardware and software, is depreciated over estimated useful lives ranging from two to six years.
We evaluate the carrying value of our property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of revenuesimpairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
We recorded pre-tax, non-cash impairment losses related to long-lived assets of Rowan that are included from the Transaction Date to December 31, 2019$34.5 million and $756.5 million, in the Company's Consolidated Statement of Operations for the Yearyear ended December 31, 2019 were $448.0 million2022 (Successor) and $122.7 million,the four months ended April 30, 2021 (Predecessor), respectively. See "Note 7 - Property and Equipment" for additional information on our impairment charges.
See "Note 4 - Revenue from Contracts with Customers" for information on our accounting policies for revenue recognition and certain operating costs that are deferred and amortized over future periods.
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the Rowan Transactionforegoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in Current income tax expense in our Consolidated Statements of Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries through an intercompany rig sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. The income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Our 2021 Management Incentive Plan (the “MIP”) allows our board of directors to authorize equity-based grants to be settled in cash, shares or a combination of shares and cash. Compensation expense for time-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for performance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
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the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in this estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs, except in the case of objectives based on a market condition, such as our stock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our Consolidated Statements of Operations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 10 - Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement Benefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our Consolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our Consolidated Statements of Operations. All income attributable to noncontrolling interest was from continuing operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to the plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million warrants (the "Warrants") to the former holders of Legacy Valaris' equity to purchase common shares of Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028.
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Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Basic and diluted earnings per share ("EPS") for the Predecessor was calculated in accordance with the two-class method. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excluded non-vested shares.
The following unaudited supplemental pro forma results present consolidated informationtable is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
Anti-dilutive share awards totaling 147,000 and 192,000 were excluded from the computation of diluted EPS for the year ended December 31, 2023 and 2022 (Successor), respectively.
Due to the net loss position, anti-dilutive shares totaling 600,000 and 300,000, for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively, were excluded from the computation of diluted EPS.
We have 5,470,950 Warrants outstanding as of December 31, 2023 which are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant. The exercise of these Warrants into Common Shares would have a dilutive effect to the holdings of Valaris Limited's existing shareholders. These Warrants are anti-dilutive for all periods presented for the Successor.
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes") for which we had the option to settle in cash, shares or a combination thereof for the aggregate amount due upon conversion. On the Effective Date, pursuant to the plan of reorganization, all outstanding obligations under the 2024 Convertible Notes were cancelled and the holders thereunder received the treatment as set forth in the plan of reorganization. However, if the Rowan Transaction was completed onLegacy Valaris average share price had exceeded the exchange price during a respective predecessor reporting period, an assumed number of shares required to settle the conversion obligation in excess of the principal amount would have been included in our denominator for the computation of diluted EPS using the treasury stock method. The Legacy Valaris average share price did not exceed the exchange price during the four months ended April 30, 2021 (Predecessor).
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New Accounting Pronouncements
Recently adopted accounting pronouncements
Business Combinations - In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“Update 2021-08”). ASU No. 2021-08 requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 and provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities for the sale of nonfinancial assets within the scope of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. The FASB issued the update to improve the accounting for acquired revenue contracts with customers in a business combination. Update 2021-08 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. We adopted Update 2021-08 effective January 1, 2019.2023 with no material impact to our financial statements upon adoption.
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The provisions in Update 2020-04 were effective upon issuance and could be applied prospectively to contract modifications made through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022, to December 31, 2024. Our long-term notes receivable from ARO (the "Notes Receivable from ARO"), has generated interest income on a LIBOR-based rate since inception of the note. In 2023, we amended the terms of the Notes Receivable from ARO whereby beginning in 2024, interest income is calculated on a Secured Overnight Financing Rate ("SOFR") based rate. The application of Update 2020-04 and ASU No. 2022-06 on this contract modification and the change in reference rates did not have a material impact on our consolidated financial statements.
Accounting pronouncements to be adopted
Improvements to Reportable Segment Disclosures - In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("Update 2023-07"), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in Update 2023-07 require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
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Improvements to Income Tax Disclosures - In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("Update 2023-09"), which expands income tax disclosure requirements to include additional information related to the rate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in Update 2023-09 also remove disclosures related to certain unrecognized tax benefits and deferred taxes. Update 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied on a prospective basis, with an option to apply the guidance retrospectively. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our consolidated financial statements.
2. CHAPTER 11 PROCEEDINGS
Chapter 11 Cases and Emergence from Chapter 11
On the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors obtained joint administration of the Chapter 11 Cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
On the Effective Date, we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520.0 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and the Common Shares were issued. Also, former holders of Legacy Valaris' equity were issued Warrants to purchase Common Shares.
Below is a summary of the terms of the plan of reorganization:
•Appointed six new members to the Company's board of directors to replace all of the directors of Legacy Valaris, other than the director also serving as President and Chief Executive Officer at the Effective Date, who was re-appointed pursuant to the plan of reorganization. All but one of the seven directors became directors as of the Effective Date and one became a director on July 1, 2021.
•Obligations under Legacy Valaris' outstanding senior notes (the "Senior Notes") were cancelled and the related indentures were cancelled, except to the limited extent expressly set forth in the plan of reorganization and the holders thereunder received the treatment as set forth in the plan of reorganization;
•The Legacy Valaris revolving credit facility (the "Revolving Credit Facility") was terminated and the holders thereunder received the treatment as set forth in the plan of reorganization;
•Holders of the Senior Notes received their pro forma resultsrata share of (1) 38.48%, or 28.9 million, of Common Shares and (2) approximately 97.6% of the subscription rights to participate in the rights offering (the "Rights Offering") through which the Company offered $550.0 million of the First Lien Notes, which includes the backstop premium;
•Holders of the Senior Notes who participated in the Rights Offering received their pro ratashare of approximately 29.3%, or 22.0 million, of Common Shares, and senior noteholders who agreed to backstop the Rights Offering received their pro rata share of approximately 2.63%, or 2.0 million of Common Shares and approximately $48.8 million in First Lien Notes as a backstop premium;
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•Certain Revolving Credit Facility lenders ("RCF Lenders") who participated in the Rights Offering received their pro rata share of approximately 0.7%, or 0.5 million Common Shares, RCF Lenders who agreed to backstop the Rights Offering received their pro rata share of 0.07%, or 49,500 of Common Shares and approximately $1.2 million in First Lien Notes as a backstop premium;
•Senior noteholders, solely with respect to Pride International LLC's 6.875% senior notes due 2020 and 7.875% senior notes due 2040, Ensco International 7.20% Debentures due 2027, and the 4.875% senior notes due 2022, 4.75% senior notes due 2024, 7.375% senior notes due 2025, 5.4% senior notes due 2042 and 5.85% senior notes due 2044, received an aggregate cash payment of $26.0 million in connection with settlement of certain alleged claims against the Company;
•The two RCF Lenders who chose to participate in the Rights Offering received their pro rata share of (1) 5.3%, or 4.0 million Common Shares (2) approximately 2.427% of the First Lien Notes (and associated Common Shares), (3) $7.8 million in cash, and (4) their pro rata share of the backstop premium. The RCF Lenders who entered into the amended restructuring support agreement and elected not to participate in the Rights Offering received their pro rata share of (1) 22.980%, or 17.2 million of Common Shares and (2) $96.1 million in cash;
•Holders of general unsecured claims are entitled to receive payment in full within ninety days after the later of (a) the Effective Date and (b) the date such claim comes due;
•0.4 million Common Shares were issued and $5.0 million was paid to Daewoo Shipbuilding & Marine Engineering Co., Ltd (the "Shipyard");
•Legacy Valaris Class A ordinary shares were cancelled and holders received 5.6 million in Warrants exercisable for one Common Share per Warrant at initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028;
•All equity-based awards of Legacy Valaris that were outstanding were cancelled;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received Common Shares;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received First Lien Notes; and
•There were no borrowings outstanding against our debtor-in-possession ("DIP") facility and there were no DIP claims that were not due and payable on, or that otherwise survived, the Effective Date. The DIP Credit Agreement terminated on the Effective Date.
Management Incentive Plan
In accordance with the plan of reorganization, Valaris Limited adopted the 2021 Management Incentive Plan (the “MIP”) as of the Effective Date and authorized and reserved 9.0 million Common Shares for issuance pursuant to equity incentive awards to be granted under the MIP, which may be in the form of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and cash awards or any combination thereof. See "Note 10 - Share Based Compensation" for more information on awards granted under the MIP after the Effective date.
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Liabilities Subject to Compromise
Prior to the Effective Date, liabilities subject to compromise were comprised primarily of the aggregate balance of our pre-petition Senior Notes of $6.5 billion, amounts drawn under the Revolving Credit Facility as of the Petition Date of $581.0 million and the corresponding unpaid accrued interest as of the Petition Date of $203.5 million.
The contractual interest expense on the outstanding Senior Notes and the Revolving Credit Facility was in excess of recorded interest expense by $132.9 million for the four months ended April 30, 2021 (Predecessor). This excess contractual interest was not included as interest expense on our Consolidated Statements of Operations as we had discontinued accruing interest on the Predecessor's Senior Notes and Revolving Credit Facility subsequent to the Petition Date. The Predecessor discontinued making interest payments on the Senior Notes beginning in June 2020.
Reorganization Items
Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our Consolidated Statements of Operations for the year ended December 31, 2022, eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor). These costs include among others,legal and other professional advisory service fees pertaining to the Chapter 11 Cases and the effects of the emergence from bankruptcy, including the application of fresh start accounting.
The components of reorganization items, net were as follows (in millions):
| Successor | Predecessor | ||||||||||||||||||||||
| Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||
| Professional fees | $ | 2.4 | $ | 17.2 | $ | 93.4 | |||||||||||||||||
| Contract items | — | (1.7) | 3.9 | ||||||||||||||||||||
| Reorganization items (fees) | 2.4 | 15.5 | 97.3 | ||||||||||||||||||||
| Contract items | — | — | 0.5 | ||||||||||||||||||||
| Backstop premium | — | — | 30.0 | ||||||||||||||||||||
| Gain on settlement of liabilities subject to compromise | — | — | (6,139.0) | ||||||||||||||||||||
| Issuance of Common Shares for backstop premium | — | — | 29.1 | ||||||||||||||||||||
| Issuance of Common Shares to the Shipyard | — | — | 5.4 | ||||||||||||||||||||
| Write-off of unrecognized share-based compensation expense | — | — | 16.0 | ||||||||||||||||||||
| Impact of newbuild contract amendments | — | — | 350.7 | ||||||||||||||||||||
| Loss on fresh start adjustments | — | — | 9,194.6 | ||||||||||||||||||||
| Reorganization items (non-cash) | — | — | 3,487.3 | ||||||||||||||||||||
| Total reorganization items, net | $ | 2.4 | $ | 15.5 | $ | 3,584.6 | |||||||||||||||||
| Reorganization items (fees) paid | $ | 2.4 | $ | 14.7 | $ | 59.0 | |||||||||||||||||
| Reorganization items (fees) unpaid | $ | — | $ | 0.8 | $ | 38.3 | |||||||||||||||||
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3. FRESH START ACCOUNTING
Applicability of Fresh Start Accounting
Upon emergence from bankruptcy, we qualified for and applied fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes because (1) the amortizationholders of the then existing Class A ordinary shares of the Predecessor received less than 50 percent of the Common Shares of the Successor outstanding upon emergence and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the total of all post-petition liabilities and allowed claims.
The reorganization value derived from the range of enterprise values associated with acquiredthe plan of reorganization was allocated to the Company’s identifiable tangible and intangible assets and liabilities (2)based on their fair values (except for deferred income taxes). The amount of deferred income taxes recorded was determined in accordance with the applicable income tax accounting standard. The April 30, 2021 fair values of the Company’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets.
Reorganization Value
The reorganization value represents the fair value of the Successor's total assets and was derived from the enterprise value associated with the plan of reorganization, which represents the estimated fair value of an entity's long-term debt and equity less unrestricted cash upon emergence from chapter 11. As set forth in the disclosure statement and approved by the Bankruptcy Court, third-party valuation advisors estimated the enterprise value to be between $1,860.0 million and $3,145.0 million. The enterprise value range of the reorganized Debtors was determined primarily by using a reductiondiscounted cash flow analysis. The value agreed in depreciation expensethe plan of reorganization is indicative of an enterprise value at the low end of this range, or $1,860.0 million.
The following table reconciles the enterprise value to the estimated fair value of Successor Common Shares as of the Effective Date (in millions, except per share value):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Less: Fair value of debt | (544.8) | ||||
| Less: Warrants | (16.4) | ||||
| Less: Noncontrolling interest | 1.1 | ||||
| Less: Pension and other post-retirement benefits liabilities | (189.0) | ||||
| Less: Adjustments not contemplated in Enterprise Value | (639.0) | ||||
| Fair value of Successor Common Shares | $ | 1,079.5 | |||
| Shares issued upon emergence | 75.0 | ||||
| Per share value | $ | 14.39 | |||
The following table reconciles the enterprise value to the reorganization value as of the Effective Date (in millions):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Plus: Non-interest bearing current liabilities | 346.0 | ||||
| Less: Adjustments not contemplated in Enterprise Value | (218.0) | ||||
| Reorganization value of Successor assets | $ | 2,595.6 | |||
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Adjustments not contemplated in Enterprise Value represent certain obligations of the Successor that were either not contemplated or contemplated in a different amount in the forecasted cash flows of the enterprise valuation performed by third-party valuation advisors that, had they incorporated those anticipated cash flows into their analysis, the resulting valuation would have been different. For the reconciliation of Reorganization value of Successor assets, this item includes certain tax balances, contract liabilities, as well as an adjustment for the fair value of pension obligations. The reconciliation to Successor Common Share value includes these same reconciling items as well as other current and non-current liabilities of the Successor at the emergence.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in the valuation utilizing assumptions regarding future day rates, utilization, operating costs and capital requirements as of the emergence date. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
Valuation Process
The fair values of the Company's principal assets and liabilities including property, plant and equipment as well as our 50% equity interest in ARO and our Notes Receivable from ARO, options to purchase VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships"), the First Lien Notes, pensions and Warrants were estimated with the assistance of third-party valuation advisors.
Property, Plant and Equipment
The valuation of the Company’s drilling rigs was estimated by using an income approach or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs, reactivation costs and capital requirements. In developing these assumptions, forecasted day rates and utilization took into account current market conditions and our anticipated business outlook. The cash flows were discounted at our weighted average cost of capital, which was derived from a blend of our after-tax cost of debt and our cost of equity and computed using public share price information for similar offshore drilling market participants, certain U.S. Treasury rates and certain risk premiums specific to the Company.
Our remaining property and equipment, (3)including owned real estate and other equipment, was valued using a cost approach, in which the amortization of premiums and discounts recorded on Rowan's debt, (iv) removalestimated replacement cost of the historical amortizationassets was adjusted for physical depreciation and obsolescence, where applicable, to arrive at estimated fair value.
The estimated fair value of unrealized gainsour property and losses relatedequipment includes an adjustment to Rowan'sreconcile to our reorganization value.
Notes Receivable from ARO
The fair value of the Notes Receivable from ARO was estimated using an income approach to value the forecasted cash flows attributed to the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium.
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Investment in ARO
We estimated the fair value of the equity investment in ARO primarily by applying an income approach, using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate.
Options to Purchase Newbuild Drillships
The fair value of the options to purchase Newbuild Drillships was estimated using an option pricing model utilizing the estimated fair value of a newbuild rig, estimated purchase price upon exercise of the options, the holding period, equity volatility and the risk-free rate.
First Lien Notes
The fair value of the First Lien Notes was determined to approximate the par value based on third-party valuation advisors’ analysis of the Company’s collateral coverage, financial metrics, and interest rate for the First Lien Notes relative to market rates of recent placements of a similar term for industry participants with similar credit risk.
Pensions
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Upon emergence, our pension and other postretirement plans were remeasured as of the Effective Date. Key assumptions at the Effective Date included (1) a weighted average discount rate of 2.81% to determine pension benefit obligations and (v)(2) an expected long-term rate of return on pension plan assets of 6.03% to determine net periodic pension cost.
Warrants
The fair value of the amortizationWarrants was determined using an option pricing model considering the contractual terms of basisthe Warrant issuance. The key market data assumptions for the option pricing model are the estimated volatility and the risk-free rate. The volatility assumption was estimated using market data for offshore drilling market participants with consideration for differences in assetsleverage. The risk-free rate assumption was based on U.S. Treasury Constant Maturity rates with a comparable term.
Condensed Consolidated Balance Sheet
The adjustments included in the following Condensed Consolidated Balance Sheet reflect the effects of the transactions contemplated by the plan of reorganization and liabilities of ARO. The pro forma results do not include any potential synergies or non-recurring charges that may result directlyexecuted by the Company on the Effective Date (reflected in the column “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the Rowan Transaction.adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded.
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| As of April 30, 2021 | |||||||||||||||||||||||
| Predecessor | Reorganization Adjustments | Fresh Start Accounting Adjustments | Successor | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 280.2 | $ | 327.4 | (a) | $ | — | $ | 607.6 | ||||||||||||||
| Restricted cash | 45.7 | 42.7 | (b) | — | 88.4 | ||||||||||||||||||
| Accounts receivable, net | 425.9 | — | — | 425.9 | |||||||||||||||||||
| Other current assets | 370.1 | 1.5 | (c) | (281.1) | (o) | 90.5 | |||||||||||||||||
| Total current assets | 1,121.9 | 371.6 | (281.1) | 1,212.4 | |||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET | 10,026.4 | (417.6) | (d) | (8,699.7) | (p) | 909.1 | |||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | — | (214.4) | (q) | 228.3 | ||||||||||||||||||
| INVESTMENT IN ARO | 123.9 | — | (43.4) | (r) | 80.5 | ||||||||||||||||||
| OTHER ASSETS | 166.4 | (10.0) | (e) | 8.9 | (s) | 165.3 | |||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
| Accounts payable - trade | $ | 161.5 | $ | 13.1 | (f) | $ | (0.5) | (t) | $ | 174.1 | |||||||||||||
| Accrued liabilities and other | 290.7 | (12.4) | (g) | (61.8) | (u) | 216.5 | |||||||||||||||||
| Total current liabilities | 452.2 | 0.7 | (62.3) | 390.6 | |||||||||||||||||||
| LONG-TERM DEBT | — | 544.8 | (h) | — | 544.8 | ||||||||||||||||||
| OTHER LIABILITIES | 706.2 | (55.2) | (i) | (85.6) | (v) | 565.4 | |||||||||||||||||
| Total liabilities not subject to compromise | 1,158.4 | 490.3 | (147.9) | 1,500.8 | |||||||||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | (7,313.7) | (j) | — | — | ||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| Predecessor Class A ordinary shares | 82.5 | (82.5) | (k) | — | — | ||||||||||||||||||
| Predecessor Class B ordinary shares | 0.1 | (0.1) | (k) | — | — | ||||||||||||||||||
| Successor common shares | — | 0.8 | (l) | — | 0.8 | ||||||||||||||||||
| Successor stock warrants | — | 16.4 | (m) | — | 16.4 | ||||||||||||||||||
| Predecessor additional paid-in capital | 8,644.0 | (8,644.0) | (k) | — | — | ||||||||||||||||||
| Successor additional paid-in capital | — | 1,078.7 | (l) | — | 1,078.7 | ||||||||||||||||||
| Retained deficit | (5,147.4) | 14,322.6 | (n) | (9,175.2) | (w) | — | |||||||||||||||||
| Accumulated other comprehensive loss | (93.4) | — | 93.4 | (x) | — | ||||||||||||||||||
| Predecessor treasury shares | (75.5) | 75.5 | (k) | — | — | ||||||||||||||||||
| Total Valaris shareholders' equity | 3,410.3 | 6,767.4 | (9,081.8) | 1,095.9 | |||||||||||||||||||
| NONCONTROLLING INTERESTS | (1.1) | — | — | (1.1) | |||||||||||||||||||
| Total equity | 3,409.2 | 6,767.4 | (9,081.8) | 1,094.8 | |||||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
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Reorganization Adjustments
(a) Cash
Represents the reorganization adjustments (in millions):
(in millions, except per share amounts) | |||||||||||
| $ | |||||||||||
| 20.0 | |||||||||||
| Funds received for liquidation of rabbi trust related to certain employee benefits | 17.6 | ||||||||||
| Payments to Predecessor creditors | (129.9) | ||||||||||
| Transfer of funds for payment of certain professional fees to escrow account | (42.7) | ||||||||||
| Payment for certain professional services fees | (29.0) | ||||||||||
| Various other | (8.6) | ||||||||||
| $ | 327.4 | ||||||||||
(b) Restricted cash
Reflects the reorganization adjustment to record the transfer of cash for payment of certain professional fees to restricted cash, which were held in escrow until billings from professionals were received and reconciled at which time the funds in the account were released.
(c) Other current asset
Reflects certain prepayments incurred upon emergence.
(d) Property and Equipment, net
Reflects the reorganization adjustment to remove $417.6 million of work-in-process related to the Newbuild Drillships. These values were removed from property and equipment, net, based on the terms of the amended agreements with the Shipyard. As a result of the option to take delivery, we removed the historical work-in-process balances from the balance sheet.
(e) Other assets
Represents the reorganization adjustments (in millions):
| Liquidation of rabbi trust related to certain employee benefits | $ | ||||||||||
| (5.5) | |||||||||||
| Fair value of options to purchase Newbuild Drillships | 13.1 | ||||||||||
| $ | (10.0) | ||||||||||
Our supplemental executive retirement plans are non-qualified plans that provided eligible employees an opportunity to defer a portion of their compensation for use after retirement. The plans were frozen to the entry of new participants in 2019 and to future compensation deferrals as of January 1, 2020. Upon emergence, assets previously held in a rabbi trust maintained for the plan were liquidated and the plan was amended.
In accordance with the amended agreement with the Shipyard, our leases were terminated and we have eliminated the historical right-of-use asset associated with the berthing locations of Newbuild Drillships.
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Additionally, upon effectiveness of the plan of reorganization, the amended agreement with the Shipyard provides the Company with the option to purchase the Newbuild Drillships. The reorganization adjustments include an asset that reflects the fair value of the option to purchase the Newbuild Drillships and embedded feature related to the ability, under the amended agreements with the Shipyard, for the equity issued pursuant to this arrangement to be put to the Company for $8.0 million of consideration for each rig, should we choose to take delivery.
(f) Accounts payable - trade
Reflects the following reorganization adjustments (in millions):
| Professional fees incurred upon emergence | $ | ||||
| Payment of professional fees incurred prior to emergence | (12.6) | ||||
| Payment of certain accounts payable incurred prior to emergence | (0.4) | ||||
| $ | 13.1 | ||||
(g) Accrued liabilities and other
Reflects the following reorganization adjustments (in millions):
| Elimination of lease liabilities associated with Newbuild Drillships | $ | (5.0) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.1) | ||||
| Payment of certain accrued liabilities incurred prior to emergence | (3.3) | ||||
| $ | (12.4) | ||||
In accordance with the amended agreement with the Shipyard, our leases were terminated and we eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships. Accrued post-petition holding costs were also eliminated as a result of the amendments made effective upon emergence. Additionally, reorganization adjustments to accrued liabilities and other includes an amount primarily related to payment of professional fees incurred prior to emergence.
(h) Long-term debt
Reflects the reorganization adjustment to record the issuance of the $550.0 million aggregate principal amount of First Lien Notes and debt issuance costs of $5.2 million.
(i) Other liabilities
Reflects the following reorganization adjustments (in millions):
| Elimination of construction contract intangible liabilities associated with Newbuild Drillships | $ | (49.9) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.7) | ||||
| Elimination of lease liabilities associated with Newbuild Drillships | (0.6) | ||||
| $ | (55.2) | ||||
The reorganization adjustments to other liabilities primarily relate to the elimination of construction contract intangible liabilities associated with the Newbuild Drillships. These construction contract intangible liabilities were recorded in purchase accounting for the original contracting entity. As the amended contract was structured as an option whereby we had the right, not the obligation to take delivery of the rigs, there was no longer an intangible liability associated with the contracts.
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We have eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships and accrued post-petition holding costs asPro forma net loss described in (g) above.
(j) Liabilities subject to compromise
Reflects the following reorganization adjustments (in millions):
| Settlement of liabilities subject to compromise | $ | 7,313.7 | |||
| Issuance of common stock to Predecessor creditors | (721.0) | ||||
| Issuance of common stock to backstop parties | (323.8) | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Gain on settlement of liabilities subject to compromise | $ | 6,139.0 | |||
(k) Predecessor ordinary shares, additional paid-in capital and loss per share were adjustedtreasury shares
Represents the cancellation of the Predecessor's ordinary shares of $82.6 million, additional paid-in capital of $8,644.0 million and treasury stock of $75.5 million.
(l) Successor common shares and additional paid-in capital
Represents par value of 75.0 million new Common Shares of $0.8 million and capital in excess of par value of $1,078.7 million.
(m) Successor stock warrants
On the Effective Date and pursuant to excludethe plan of reorganization, Valaris Limited issued an aggregate $108.1of 5.6 million Warrants exercisable for up to an aggregate of transaction5.6 million Common Shares to former holders of Legacy Valaris' equity interests. The fair value of the Warrants as of the Effective Date was $16.4 million.
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(n) Retained deficit
Represents the reorganization adjustments to total equity as follows (in millions):
| Gain on settlement of liabilities subject to compromise | $ | (6,139.0) | |||
| Issuance of Common Shares for backstop premium | 29.1 | ||||
| Issuance of Common Shares to the Shipyard | 5.4 | ||||
| Write-off of unrecognized share-based compensation expense | 16.0 | ||||
| Professional fees and success fees | 35.9 | ||||
| Backstop premium | 30.0 | ||||
| Impact of newbuild contract amendments | 350.7 | ||||
| Reorganization items, net | (5,671.9) | ||||
| Cancellation of Predecessor common shares | (82.6) | ||||
| Cancellation of Predecessor treasury shares | 75.5 | ||||
| Cancellation of Predecessor additional paid in capital | (7,856.4) | ||||
| Cancellation of equity component of Predecessor convertible notes | (220.0) | ||||
| Cancellation of Predecessor cash and equity compensation plans | (583.6) | ||||
| Fair value of Warrants | 16.4 | ||||
| $ | (14,322.6) | ||||
Fresh Start Adjustments
(o) Other current assets
Reflects the fresh start adjustments to record the estimated fair value of other current assets as follows (in millions):
| Elimination of materials and supplies | $ | (260.8) | |||
| Elimination of historical deferred contract drilling expenses | (20.3) | ||||
| $ | (281.1) | ||||
Primarily reflects the fresh start adjustment to eliminate the historical balance for materials and supplies as the result of a change in accounting policies upon emergence. Historically, we recognized materials and supplies on the balance sheet when purchased and subsequently expensed items when consumed. Upon emergence from bankruptcy, we elected to change our accounting policies related to materials and integrationsupplies whereby materials and supplies will be expensed as a period cost when received. Additionally, a customer arrangement provides that we take title to their materials and supplies for the duration of the contract and return or pay cash for them at the termination of the contract. Together with our policy change on materials and supplies, we elected to record these assets and the obligation to our customer on a net basis as opposed to a gross basis.
The fresh start adjustment for the elimination of historical deferred contract drilling expenses primarily relates to deferred mobilization costs, deferred contract preparation costs and deferred certification costs. Costs incurred for mobilization and contract preparation prior to the commencement of drilling services are deferred and subsequently amortized over the term of the related drilling contract. Additionally, we must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. These deferred costs had no future economic benefit and were eliminated from the fresh start financial statements.
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(p) Property and equipment, net
Reflects the fresh start adjustments to historical amounts to record the estimated fair value of property and equipment.
Furthermore, upon emergence from bankruptcy, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components. Prior to emergence, we recorded our drilling rigs as a single asset with a useful life ascribed by the expected useful life of that asset.
(q) Notes Receivable from ARO
Reflects the fresh start adjustment to record the estimated fair value of the Notes Receivable from ARO.
(r) Investment in ARO
Reflects the fresh start adjustment to record the estimated fair value of the equity investment in ARO.
(s) Other assets
Reflects the fresh start adjustments to record the estimated fair value of other assets as follows (in millions):
| Deferred tax impacts of certain fresh start adjustments | $ | 21.1 | |||
| Fair value of contracts with customers | 8.5 | ||||
| Fair value adjustments to right-of-use assets | 0.4 | ||||
| Elimination of historical deferred contract drilling expenses | (16.5) | ||||
| Elimination of other deferred costs | (4.6) | ||||
| $ | 8.9 | ||||
The fresh start adjustment for deferred income tax assets represents the estimated incremental deferred income taxes, which reflects the tax effect of the differences between the estimated fair value of certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to record the estimated fair value of contracts with customers represents the intangible assets recognized for firm customer contracts in place at the Effective Date that have favorable contract terms as compared to current market day rates for comparable drilling rigs.The various factors considered in the adjustment were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the emergence date. The intangible assets are computed based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to right-of-use assets reflects the remeasuring of our operating leases as of the emergence date. Certain operating leases had unfavorable terms as of the emergence date, and as a result the right-of-use asset for such leases did not equal the lease liability upon emergence.
The fresh start adjustment to eliminate historical deferred contract drilling expenses reflects the noncurrent portion of historical deferred contract drilling expenses described in (o) above as well as the elimination of customer contract intangibles previously recorded in purchase accounting for a 2019 transaction.
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The fresh start adjustments to eliminate other deferred costs reflect non-operational deferred costs that had no future economic benefit.
(t) Accounts payable - trade
The fresh start adjustment to accounts payable trade reflects the write off of certain deferred amounts related to our operating leases. This value was eliminated through the remeasurement of our leases as of the emergence date.
(u) Accrued liabilities and other
Reflects the fresh start adjustments to record the estimated fair value of current liabilities as follows (in millions):
| Elimination of customer payable balance | $ | (36.8) | |||
| Elimination of historical deferred revenues | (25.9) | ||||
| Fair value of contracts with customers | 0.5 | ||||
| Fair value adjustment to lease liabilities | 0.4 | ||||
| $ | (61.8) | ||||
The fresh start adjustment to eliminate the customer payable balance is related to the change in accounting policy to present the balance on a net basis.
The fresh start adjustment to eliminate historical deferred revenues is primarily related to amounts previously received for the reimbursement for capital upgrades, upfront contract deferral fees and mobilization. Such amounts are deferred and subsequently amortized over the term of the related drilling contract. The deferred revenue did not represent any future performance obligations and was therefore eliminated as a fresh start accounting adjustment.
The fresh start adjustment to record the estimated fair value of contracts with customers reflects the intangible liabilities recognized for firm customer contracts in place at the Effective Date that have unfavorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the adjustment and computation of the intangible liabilities are described in (s) above. This balance was amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(v) Other liabilities
Reflects the fresh start adjustments to record the estimated fair value of other liabilities as follows (in millions):
| Adjustment to fair value of pension and other post-retirement plan liabilities | $ | (82.7) | |||
| Elimination of historical deferred revenue | (5.9) | ||||
| Deferred tax impacts of certain fresh start adjustments | 1.7 | ||||
| Fair value adjustments to lease liabilities | 1.1 | ||||
| Fair value adjustments to other liabilities | 0.2 | ||||
| $ | (85.6) | ||||
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The fresh start adjustment to fair value pension and other post-retirement plan liabilities results from the remeasurement of the pension and other post-retirement benefit plans at the emergence date.
The fresh start adjustment to eliminate deferred revenues reflects the noncurrent portion of deferred revenues described in (u) above.
The fresh start adjustment for deferred income tax liabilities represents the estimated incremental deferred taxes, which reflects the tax effect of the differences between the estimated fair value certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(w) Retained Deficit
Reflects the fresh start adjustments to retained deficit as follows (in millions):
| Fair value adjustments to prepaid and other current assets | $ | (281.1) | |||
| Fair value adjustments to property | (8,699.7) | ||||
| Fair value of intangible assets | 8.5 | ||||
| Fair value adjustment to investment in ARO | (43.4) | ||||
| Fair value adjustment to note receivable from ARO | (214.4) | ||||
| Fair value adjustments to other assets | (20.7) | ||||
| Fair value adjustments to other current liability | 62.8 | ||||
| Fair value of intangible liabilities | (0.5) | ||||
| Fair value adjustment to other liabilities | 87.3 | ||||
| Elimination of Predecessor accumulated other comprehensive loss | (93.4) | ||||
| Total fresh start adjustments included in reorganization items, net | $ | (9,194.6) | |||
| Tax impact of fresh start adjustments | 19.4 | ||||
| $ | (9,175.2) | ||||
(x) Accumulated other comprehensive loss
Reflects the fresh start adjustments for the elimination of Predecessor accumulated other comprehensive loss through Reorganization items, net.
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Under our drilling contracts with customers, we provide a drilling rig and drilling services, including rig crews, on a day rate basis. We receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.
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Our drilling contracts contain a lease component and we have elected to apply the practical expedient provided under Accounting Standards Codification ("ASC") 842 to not separate the lease and non-lease components and apply the revenue recognition guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.
The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of December 31, 2023 was between approximately 1 month and 5 years.
Day Rate Drilling Revenue
Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices are typically 30 days.
Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
Contract Termination - VALARIS DS-11
In 2021, a contract was awarded to VALARIS DS-11 for a project in the U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract. As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Consolidated Statements of Operations for the year ended December 31, 2019. Additionally, pro forma net loss2022 (Successor).
Mobilization / Demobilization Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and loss per share excludepersonnel prior to the measurement periodcommencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in Operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in Contract drilling expense.
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Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
Capital Upgrade / Contract Preparation Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation generally for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and estimated gainother contract preparation work are recorded as a contract liability and amortized on bargain purchasea straight-line basis over the contract term to Operating revenues.
Revenues Related to Reimbursable Expenses
We generally receive reimbursements from our customers for purchases of $637.0 millionsupplies, equipment, personnel services and other services provided at their request. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is recognized during the yearperiod in which the corresponding goods and services are consumed once the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer within Operating revenues.
Contract Assets and Liabilities
Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.
Contract liabilities generally represent fees received for mobilization, capital upgrades or in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the difference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 5 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.
Contract assets and liabilities are presented net on our Consolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in Other current assets and Accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in Other assets and Other liabilities, respectively, on our Consolidated Balance Sheets.
The following table summarizes our contract assets and contract liabilities (in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Current contract assets | $ | 1.5 | $ | 4.6 | |||||||
| Noncurrent contract assets | $ | 4.5 | $ | 0.7 | |||||||
| Current contract liabilities (deferred revenue) | $ | 116.2 | $ | 78.0 | |||||||
| Noncurrent contract liabilities (deferred revenue) | $ | 37.6 | $ | 41.0 | |||||||
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Changes in contract assets and liabilities during the period are as follows (in millions):
| Contract Assets | Contract Liabilities | ||||||||||
| Balance as of December 31, 2021 | $ | 0.3 | $ | 56.6 | |||||||
| Revenue recognized in advance of right to bill customer | 9.2 | — | |||||||||
| Increase due to revenue deferred during the period | — | 156.7 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (41.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (47.1) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (4.2) | (6.1) | |||||||||
| Balance as of December 31, 2022 | 5.3 | 119.0 | |||||||||
| Revenue recognized in advance of right to bill customer | 8.4 | — | |||||||||
| Increase due to revenue deferred during the period | — | 162.9 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (73.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (46.5) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (7.7) | (8.5) | |||||||||
| Balance as of December 31, 2023 | $ | 6.0 | $ | 153.8 | |||||||
Deferred Contract Costs
Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs are included in Other current assets and Other assets on our Consolidated Balance Sheets and totaled $85.1 million and $57.3 million as of December 31, 2023 and 2022, respectively. During the years ended December 31, 2019.2023 and 2022, and eight months ended December 31, 2021 (Successor), amortization of such costs totaled $92.9 million, $61.7 million and $22.0 million, respectively. During the four months ended April 30, 2021 (Predecessor), amortization of such costs totaled $7.6 million.
Deferred Certification Costs
We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. Deferred regulatory certification and compliance costs are included in Other current assets and Other assets on our Consolidated Balance Sheets and totaled $14.5 million and $16.2 million as of December 31, 2023 and 2022, respectively. During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor), amortization of such costs totaled $12.7 million, $4.7 million and $0.7 million, respectively. During the four months ended April 30, 2021 (Predecessor), amortization of these costs totaled $3.1 million.
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Future Amortization of Contract Liabilities and Deferred Costs
Our contract liabilities and deferred costs are amortized on a straight-line basis over the contract term or corresponding certification period to Operating revenues and Contract drilling expense, respectively, with the exception of the contract liabilities related to our bareboat charter arrangements with ARO which would not be contractually payable until the end of the lease term or termination, if sooner. See "Note 5 - Equity Method Investment in ARO" for additional information on ARO and related arrangements. The table below reflects the expected future amortization of our contract liabilities and deferred costs recorded as of December 31, 2023. In the case of our contract liabilities related to our bareboat charter arrangements with ARO, the contract liability is not amortized and as such, the amount is reflected in the table below at the end of the current lease term.
| (In millions) | ||||||||||||||||||||||||||||||||
| 2024 | 2025 | 2026 | 2027 & Thereafter | Total | ||||||||||||||||||||||||||||
| Amortization of contract liabilities | $ | 116.2 | $ | 24.7 | $ | 12.1 | $ | 0.8 | $ | 153.8 | ||||||||||||||||||||||
| Amortization of deferred costs | $ | 75.3 | $ | 15.9 | $ | 8.1 | $ | 0.3 | $ | 99.6 | ||||||||||||||||||||||
5. EQUITY METHOD INVESTMENT IN ARO
Background
ARO is a company50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates offshore drilling rigs in Saudi Arabia, was formed and commenced operations in 2017 pursuant to the termsArabia. As of an agreement entered into by Rowan and Saudi Aramco to create a 50/50 joint venture ("Shareholder Agreement"). Pursuant to the Rowan Transaction, Valaris acquired Rowan's interest inDecember 31, 2023, ARO making Valaris a 50% partner. ARO owns 7owned eight jackup rigs, hashad ordered 2one newbuild jackup rigs and leases 9leased eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. As ofAt December 31, 2020, all 9 of2023, the leased rigs were operating under three-year drilling contracts, or related extensions, with Saudi Aramco. The 7eight rigs owned by ARO previously purchased from Rowan and Saudi Aramco, are currently operating under contracts with Saudi Aramco, for aneach with a minimum aggregate contract term of 15 years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.
The Lease Agreements with ARO originally provided for a fixed per day bareboat charter amount overshareholder agreement governing the term of the lease, calculated based on a split of projected earnings over the lease term. However, in December 2020, the Shareholder Agreement was amended ("December Amendment"joint venture (the "Shareholder Agreement") such that the per day bareboat charter amount in the associated lease agreements is subject to adjustment based on actual performance of the respective rig and that a cash payment based on actual results will be due at the end of the lease term or, if sooner, termination. The Company, as lessor, accounts for these arrangements as operating leases. The December Amendment resulted in a modification of the leases and as a result we began accounting for lease revenue using the variable rate as opposed to a fixed rental amount. Our results of operations for the year ended December 31, 2020 reflect the impact of the lease modification on our rental revenues to reflect results through that period.
Summarized Financial Information
The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the 7 ARO-owned jackup rigs as well as the rigs leased from us.
Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in contract drilling expense and general and administrative, depending on the function to which the seconded employee's service related. Substantially all costs incurred under the Transition Services Agreement are included in general and administrative. See additional discussion below regarding these related-party transactions.
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Summarized financial information for ARO is as follows (in millions):
| Year Ended December 31, 2020 | April 11, 2019 - December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||
| Revenues | Revenues | $ | 549.4 | $ | 410.5 | |||||||||||||||||||||||||||||||||||||
| Operating expenses | Operating expenses | |||||||||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | ||||||||||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | ||||||||||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | Contract drilling (exclusive of depreciation) | 388.2 | 280.2 | |||||||||||||||||||||||||||||||||||||||
| Depreciation | Depreciation | 54.8 | 40.3 | |||||||||||||||||||||||||||||||||||||||
| General and administrative | General and administrative | 24.2 | 27.1 | |||||||||||||||||||||||||||||||||||||||
| Operating income | Operating income | 82.2 | 62.9 | |||||||||||||||||||||||||||||||||||||||
| Other expense, net | Other expense, net | 26.7 | 28.6 | |||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | Provision for income taxes | 14.2 | 9.7 | |||||||||||||||||||||||||||||||||||||||
| Net income | Net income | $ | 41.3 | $ | 24.6 | |||||||||||||||||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||
| Current assets | $ | 358.6 | $ | 407.2 | |||||||||||||||||||||||||||||
| December 31, 2023 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||||||||||||||
| Other current assets | |||||||||||||||||||||||||||||||||
| Non-current assets | Non-current assets | 804.0 | 874.8 | ||||||||||||||||||||||||||||||
| Total assets | Total assets | $ | 1,162.6 | $ | 1,282.0 | ||||||||||||||||||||||||||||
| Current liabilities | Current liabilities | $ | 70.8 | $ | 183.2 | ||||||||||||||||||||||||||||
| Current liabilities | |||||||||||||||||||||||||||||||||
| Current liabilities | |||||||||||||||||||||||||||||||||
| Non-current liabilities | Non-current liabilities | 950.8 | 1,015.5 | ||||||||||||||||||||||||||||||
| Total liabilities | Total liabilities | $ | 1,021.6 | $ | 1,198.7 | ||||||||||||||||||||||||||||